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Fish or fishing rods?

In the case of the Catalan fiscal deficit, neither is it destined for the poorest territories nor are they supported by the richest

Joan Majó claimed in Ara on Monday 1st August that, by a principle of solidarity, it is logical that there should be some transfer of financial resources from Catalonia to poorer territories. Leaving to one side whether logical is the correct term, or whether perhaps he meant fair or even necessary, this claim raises not a few questions. The first would be if, by way of the same “logic”, the beneficiary territories shouldn’t really be the least rich, all those situated on other continents or, in the case of Europe, in other latitudes. The second would be to find out if it is really the richest making the transfers. That would depend on their tax structures: whether they are more or less progressive and redistributive. This question is easily answered in the case of the Catalan fiscal deficit: no, it is not the richest who contribute the most financially nor, as a result, are they the source of the revenue transfers. In short, in the case of the Catalan fiscal deficit, neither is it destined for the poorest territories nor are they supported by the richest. Just like social benefits, they are paid for by active workers.

More offensive still is the verification of the second element quoted by Majó, which is to do with the objectives. Whilst accepting that financial transfers should contribute to the progressive reduction of inequality, the complete failure of Spain’s cohesion policy must be acknowledged. In the more than forty years since it was implemented during the transition to democracy to replace Francoism’s mechanism of migratory flows, financial transfers have barely narrowed the regional gap in income creation, despite having rebalanced their distribution to the extent of inverting the terms: those who generate the least have the most and vice versa. And the question isn’t the need to respect the principle of ordinality [1] cited by Majó and found in the Catalan Statute that was struck down by Spain’s Constitutional Court; rather, the question is what is done, and what hasn’t been done, with the transfer of tax revenues in order to balance out the creation of wealth. Hence the title of this article: revenue transfers should always provide fishing rods and not simply fish, which gives rise to damaging dependencies.

Being the recipient of enormous wealth transfers can end up being worse than having to pay them, as received transfers maintain a greater level of demand than there would be in their absence and, as such, higher prices and salaries. That is, competition remains below that which would be necessary to turn the situation around and create enough jobs. What else could cause the differences in unemployment levels between regions in both times of prosperity and downturns? Any redistribution of wealth either promotes equality of opportunities or becomes a mechanism which perpetuates and entrenches inequalities, like with the old practice of church-goers giving alms to the poor outside; worse still, since that occasionally resolved pressing needs. In the end, this is what Susana Díaz[2] and other Spanish leaders like her must choose between: to continue giving handouts to their electorate or to give their people their dignity back.

As I’ve written on other occasions, this is also a European debate, if not the preeminent European debate. Firstly, because Europe’s policy of cohesion has been a failure on a par with Spain’s, with the main beneficiaries in recent days —Greece, Portugal, Ireland and Spain— becoming those in need of a bailout only yesterday. Why were the resources insufficient and why did they contribute to inflating a public sector bubble in parallel with the private sector’s? In the case of Spain, we know that the ludicrous projects that they funded didn’t contribute one dime to improving competition; indeed, they made it worse still.

Nowadays, the policy of European cohesion —which manages less than 0.5% of Europe’s GDP— is based on plans aimed at improving the competitiveness of the beneficiaries. What’s more, the European Parliament is currently in the process of approving an initiative to condition financial aid towards macroeconomic balance that will not allow those funds to nurture commercial deficits and/or live alongside public deficits like they used to. This is something that counts on the support of the right and the left wings of the contributing countries, but not of the receiving countries; for that matter, it is something that has little to do with the right/left divide and everything to do with the countries’ relative positions. And it is something that will have to be addressed before any greater fiscal integration is achieved, both to convince the contributors and to construct a mechanism that doesn’t create the perversions that we know all too well here.

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[1] N.T. The 2006 Statute of Autonomy of Catalonia included a “principle of ordinality” which states that Catalonia’s ranking in Spain by funds per capita must not fall after any redistribution of wealth.

[2] N.T. Susana Díaz is the current President of Andalusia, which has the second lowest GDP per capita of Spain’s autonomous communities.