Why is Catalonia’s fiscal deficit so irksome?

In a number of writings and public appearances Josep Borrell —whom I respect and have known for years— has attributed to me the statement that Catalonia's fiscal deficit with Spain is on the order of 3 billion euros. He has contrasted this with calculations published by the Catalan authorities, which put it at 11.0 billion euros (the figures are from 2012, the latest data available).

Of the two calculation methodologies used by the Generalitat —monetary flow and tax-benefit— Borrell chooses to use only the second on. So will I. But I want to voice my discrepancy with the idea that this is "the right method". In times of high unemployment the recipient of the benefits is important, but also where the corresponding job is created. And the idea that the Prado Museum in Madrid benefits Catalonia but Barcelona’s MNAC doesn't benefit the rest of Spain is odd.

It would be surprising that I would contradict the Generalitat's figures, for which I was responsible for a number of years. Until now, however, I've not stepped into the fray, for two reasons that probably have laziness as a point in common. Firstly, I'm of the opinion that in the relationship with Spain Catalonia's fundamental economic problem is not the fiscal deficit (as measured by the Generalitat's method) but, rather, self-government. Seconly, Borrell is so blatantly wrong that I can't believe that he could be confused. I have to conclude that this is not a serious academic debate, but simply a political controversy. But I can't claim that this isn't my field, either. So I must jump into the debate.

To understand the nature of Borrell's error, it might be helpful to consider an extreme case. Imagine a country made up of two regions, A and B. In a given year, the national Treasury spends a value of 50 in each of the two regions. The taxes collected generate revenue for the Treasury of 50 in region A and 0 in region B. Anybody would say that there is no deficit in region A because it receives 50 and pays 50. But that's not the case: the State as a whole generates a deficit of 50, which is not applied only to region B but to both regions as a whole. The deficit generates a debt, and it will be the citizens of the two regions that will have to repay it. Most probably, due to its fiscal capacity, region A will have to pay back a significant percentage. Debt is as real a liability for region A as the liability of tax payments, in the same way that if someone orders a beer in a bar it creates an account payable. It makes no difference whether this payment is made in cash or credit (always assuming that debts are paid!).

Now imagine for a moment that in the previous example the tax collection for region B was 100. Then the combination of the two regions would have a surplus of 50. Would you say now that region A is in balance? Of course not. The overall surplus would reduce the accumulated debt for the whole (or it would become a reserve fund for the future) and, as a result, region A would be receiving a fiscal benefit equal to the part of the accumulated debt which it would be responsible for, if it had not been cancelled out by the current surplus. With the sign changed, the case of collective debt remains the same.

However, for some reason Borrell decided that the indebtedness of the State does not generate liabilities for its citizens. As in recent years Spain’s public deficit has been very high (in 2012 it was 7% of GDP -- that is, 70 billion euros; for technical reasons in the fiscal deficit calculation a lower figure is counted) and Catalonia has provided about 20% of tax revenue, the effect of this decision is drastic. And this is where the difference between the €3 billion and the €11 billion comes from. The rest is just details.

None of this is trivial. Over time, the tax revenue raised in Catalonia has systematically been insufficient to meet public expenses in Catalonia; therefore, we can infer that Catalonia has not benefitted from the revenue generated by Spain's indebtedness. That is, we pay for a debt that we have not generated, and it's not a small amount. And I wonder —to go back to my first observation— whether it wouldn't be reasonable for this to have as an offset the high level of self-governance that we have always asked for. It is, I believe, the agreement that we expected during the transition to democracy: real self-government in exchange for not making the fiscal deficit a thorny issue. It was only fair, but unfortunately it has been a frustrated hope. This is why Catalonia’s fiscal deficit is talked about more now than 20 years go. It is more irksome.