• Fiscal balances: an issue on the table

    Fiscal balances: an issue on the table

    By Marta Espasa on Tue, 29/07/2014 – 14:17
    Catalan News Agency (CNA)
    Catalan Views Blog

    A fiscal balance is a tool that measures the central government’s redistribution impact among the Autonomous Communities. That is to say, this allows one to know the expenditure made by the central government in a given territory and the fiscal revenue obtained from that territory. The fiscal balance is the difference between the expenditure allocated and the revenue collected by the central government in a specific territory. Therefore, when an Autonomous Community posts a fiscal deficit, it means that the revenue the central government obtains from that territory is higher than the expenditure it makes. At the same time, a fiscal surplus indicates that the revenue obtained is lower than the expenditure.

    In order to obtain such a calculation there are two important methodological approaches which are complementary and answer different questions: the flow approach and the tax-benefit approach. The first one aims to measure the economic impact generated by the central government in a given territory, whilst the tax-benefit approaches  tries to calculate the impact of the central government’s actions on the citizens living in a given territory.

    The criteria behind the flow approach method consist in attributing revenue in accordance to the place where the taxable economic capacity is located and the expenditure in accordance to the territory where they take place. Nevertheless, the criteria behind the tax-benefit approach  allocates revenue to the territory where the people who finally bear the tax burden reside,, while expenditure is attributed to the place where beneficiaries live, independently from the geographic place where the service or investment takes place.

    The tax-benefit methodology is reasonable, but its implementation is very subjective, since multiple and controversial hypotheses have to be set regarding who bears the burden of taxation and who is benefiting from each and every expenditure item.

    On the other hand, the flow approach is much more objective, since it only analyses the destination of public expenditure, a criterion that the State’s public accounting system applies, as all the budget items include a territorial code. In this way, for instance, the territorial attribution of a grant for farmers from an Autonomous Community is directly using the flow approach. Instead, the implementation of the tax-benefit criteria means also analysing who benefits from this grant, being the farmers but also the consumers who will be able to buy products at a lower price, the agri-food industry, etc. and also several hypotheses regarding how this benefit is split among these different groups of people have to be set.

    Regarding the results of the study presented by the Spanish Finance Ministry and compiled by Angel De la Fuente, Ramón Barberan and Ezequiel Uriel, the first thing to be said is that they do not calculate the fiscal balances but what they call “Public territorialised accounts“. In fact, they never talk about fiscal balance, among others issue, because they include the tax revenue of both the Autonomous Communities and local governments in the calculation, which is something unprecedented in the case of the fiscal balances.

    Besides, the study only applies the tax benefit approach, which is the one splitting most of the central government’s expenditure among all the Spanish citizens, regardless of where they live. In addition, they consider the flow approach as an invalid methodology. This issue is questionable, since most of the studies at a national and international level consider that both approaches are valid.

    Finally, regarding the results, they are difficult to justify and far from reality. An example is the fact that Catalonia presents an expenditure which is €910 million higher than the Spanish average, while the Madrid Region has a central government’s spending which is €2,455 million below the Spanish average. It is hard to believe, isn’t it?


    by Marta Espasa

    Professor of Economics at Universitat de Barcelona


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