Download The Economic Crisis of 2008+: The impact on Spain`s

The Economic Crisis of 2008+: The
impact on Spain's Public Finances and
Federalism
J. Ruiz-Huerta
University Rey Juan Carlos (Madrid)
and CIRANO (Quebec)
General Index
1.
Background. Crisis, Spain
2.
Spanish economic data: recent performance: From an intense
expansion to economic recession since 2008.
3.
Some explanations of the differential Impact of the crisis in Spain
4.
Public Finance in Spain:
1. The Expenditure side and decentralization.
2. Revenue and fiscal Structure. AC Financing
3. Deficit and Debt. Distribution among levels of Government
4. Pros and cons of the Devolution process in Spain.
5.
Territorial tensions: the case of Catalonia.
6. Final reflections and perspectives.
1. A note on the origin and causes of the crisis.
The origin of the last international financial crisis is a huge fraud linked to the
issue of financial assets without proper guarantees by the United States Banks
that were bought, rashly, by financial entities of most of the world’s developed
countries, mainly Europeans, and shared among their customers.
Main factors:
 Easy credit conditions during the 2002–2008 period, that encouraged highrisk lending and borrowing practices.
 Real State bubbles. which subsequently burst.
 International trade imbalances and huge private indebtedness.
 Some fiscal policies choices that, in some cases, exaggerated the crisis.
 Policies applied by different Governments to bail out troubled banking
sectors and private bondholders, assuming private debt burdens or
socializing losses.
1. Seventeen Countries make up the Eurozone today
1. Spain and the Autonomous Communities (17)
5
2. Expansion and crisis
% change in GDP, at market prices % change)
(Eurostat, 2013)
6,0
4,0
2,0
0,0
-2,0
-4,0
-6,0
1996
1997
1998
1999
2000
2001
2002
2003
2004
European Union (27 countries)
2005
2006
2007
2008
2009
2010
Euro area (17 countries)
2011
2012
2013
Spain
2014
2. Accumulated GDP growth ratio in Canada, Spain and US
during the new century (FMI, 2013)
Canada - PIB réel
Espagne - PIB réel
États-Unis - PIB réel
130
125
120
115
110
105
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2. Unemployment rate, annual average (%)
(Eurostat 2013)
30
25
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
European Union (27 countries)
2004
2005
2006
2007
2008
2009
Euro area (17 countries)
2010
2011
2012
Spain
2. Current account balance of payments as percentage of GDP
(Spain and Germany. Source: Eurostat)
10
8
6
4
2
0
1995
-2
-4
-6
-8
-10
-12
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Germany
Spain
2. Government deficit/surplus 1995-2011 (% of GDP)
(Source: Eurostat)
4,0
2,0
0,0
-2,0
-4,0
-6,0
-8,0
-10,0
-12,0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Euro area (17 countries)
2005
2006
2007
Spain
2008
2009
2010
2011
2. Consolidated gross Government debt (% of GDP)
(Source: Eurostat)
100,0
90,0
80,0
70,0
60,0
50,0
40,0
30,0
20,0
10,0
0,0
1995
1996
1997
1998
1999
2000
2001
2002
European Union (27 countries)
2003
2004
2005
2006
2007
2008
Euro area (17 countries)
2009
2010
Spain
2011
3. Reasons for the previous success and the fragility of the model
1. A growing part of the Spanish economy was dependent on the
residential building sector. The increase of house prices, the
subsequent “wealth effect” and the fiscal incentives applied to buy
houses generated a “housing bubble” as in other countries.
1. The decreasing value of interest rates increased the overall debt of
households (mortgages) and firms. Current account balances showed
persistent deficits of about 10 percent of GDP as opposed to those of
other European countries, which were a clear sign of the country’s
continued loss of competitiveness This involved a serious dependence
on other countries through the financial system.
3. The general belief in the continuity and permanence of economic
expansion made it difficult to introduce political changes. No anticyclical economic or structural policies were applied to cool down the
overheating of the economy as a whole.
3. Some reasons for the differential crisis in Spain
• When the bubble burst, prices fell, assets were depreciated and this led to the
crisis in the Financial System.
• The Government had to bail out the financial sector, thereby increasing the
deficit. But the credit did not increase.
• The crisis in the real sector produced a slump in economic activity,
• The austerity policy defended by the European institutions has generated an
intensification of the crisis in the southern European countries.
• The transfer of the monetary policy implied a limited margin of action for the
governments integrated in the EZ to combat the crisis. EZ governments must issue
their debt in a currency they cannot control.
• The sovereignty crisis was consequence of public accounts disequilibria and the
speculative financial movements against the Southern countries.
• The Central European Bank could not play the role of a lender of last resort.
4.1 Public Finance in Spain: The expenditure side
Public expenditure /GDP in Spain and EU-15
(Source: OECD Economic Outlook)
55
50
45
40
35
30
25
España
UE-15
2012 (e)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
20
4.1 Decentralization: Vertical Distribution of Expenditure
Source: IGAE (General Comptroller) (Several years)
1985
2001
2006
2010
CENTRAL
38.2
24.1
22.2
20.4
SOCIAL SECURITY
38.7
29.3
28.5
31.6
REGIONAL
12.5
33.8
35.9
34.6
LOCAL
10.7
12.8
13.4
13.4
TOTAL
100
100
100
100
España
UE-15
2012 (e)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
4.2 Public Finance in Spain: The evolution of revenues
Public revenue/GDP in Spain EU-15
(Source: OECD Economic Outlook)
55
50
45
40
35
30
25
20
4.2 Spanish tax structure
EU-15 Direct taxes Indirect taxes Social contributions
(Source: European Commission: General Government Data)
SPAIN
EU (15)
45
45
40
40
35
35
Direct
Taxes
30
Direct
Taxes
30
25
25
20
15
Indirect
Taxes
20
Indirect
Taxes
15
10
10
Social
Social
5
5
0
2012 (e)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
2012 (e)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
4.2 Evolution of the main taxes
(PIT, VAT, Corporations, Excise Taxes)
(Source: AEAT, MHAP)
Main Taxes
(Millones de euros)
80 000
PIT
70 000
60 000
VAT
50 000
40 000
Corporat
ion Tax
30 000
20 000
EXICES
10 000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
4.2 Fiscal system in Spain: Main topics
• Five main sources: Social Contributions, PIT, Corporate Tax, VAT and Excises
Taxes.
• Similar Social Contributions than the EU average. Lower level in terms of
traditional taxes.
• The crisis has affected seriously tax revenues, especially it has been the case of
VAT and Corporation Tax.
• There are increasing difficulties of taxing capital and business revenues.
• The need to combat fiscal deficits following the sovereign debt crisis has
obliged the Spanish Government (and ACs) to increase the fiscal burden and to
cut some public services, and try to introduce flexibility in different markets.
• There are still high levels of fraud and corruption, especially in a context
increasingly globalized.
• In the present situation it seems to be almost impossible to guarantee the
maintenance of the welfare state in Spain (similar to the ones of the more
developed European countries).
4.2 Vertical distribution of revenues
Source: IGAE (General Comptroller) (Several years)
1998
2006
2010
CENTRAL
48.3
38.1
36.6
SOCIAL SECURITY
31.7
29.4
33.4
REGIONAL
9.3
22.3
19.1
LOCAL
10.7
10.2
10.9
TOTAL
100
100
100
4.2 General (Common) Financing System in Spain
AUTONOMOUS COMMUNITIES
TAX REVENUES
EN
TRANSFERS
GENERAL ADMINISTRATION
OF THE STATE (CG)
4.2 The Common System
• 15 Regions. Vertical gap (top-down transfers); Horizontal gap (intensive
redistribution).
• Devolved taxes: Property, Wealth Transfer and Gambling (all with strong
regulatory powers).
• Shared taxes (managed by Central Government Tax Agency)
– PIT (50%)
– VAT (50%)
– Excise taxes (58%)
– Electricity and Automobile Licences (100%)
• Equalization transfers:
– Essential Public Services Fund (Horizontal equalization)
– Global Sufficiency Fund (Vertical: Adjustment clause)
– Competitive Fund: (Re-ranking correction)
– Cooperation Fund: (Compensation to low income regions)
4.2 Foral (Charter) Financing System
AUTONOMOUS COMMUNITIES
EN
GENERAL STATE
ADMINISTRATION
TAX
REVENUES
QUOTA/CUPO
4.2 Foral System (Basque Country and Navarre):
Advantages and problems
- Advantages:
Higher level of resources and expenditure.
Total financial autonomy (with some harmonization rules).
Incentives for sound fiscal management (independence).
- Problems:
Bottom-up intergovernmental transfers
Unequal fiscal competence.
Frequent conflicts with the state.
Lower fiscal pressure than that of standard Autonomous
Communities.
Low contribution to solidarity.
Comparative grievances and demands for equalization.
24
4.3 Fiscal Balance and Public Debt
(Source: MEC: Stability Program, 2013)
4,0
Fiscal
Balance
2,0
0,0
Public Debt/GDP
90
80
-2,0
Local Entities
-4,0
Autonomous
Communities
-6,0
Social Security
-8,0
Central
Administration
-10,0
70
60
50
40
30
20
-12,0
10
-14,0
0
2007
2008
2009
2010 2011* 2012*
2007
2008
2009
2010
2011
2012
2011
2012
Objetivo 2012
Objetivo 2013
Extremadura
Rioja
Asturias
Madrid
Cantabria
Galicia
Canarias
Navarra
País Vasco
Castilla y León
Aragón
Castilla-La Mancha
CCAA-17
Baleares
Cataluña
Andalucía
Murcia
C. Valenciana
4.3 ACs Public Deficit between 2011 and 2012.
(Source: MEC: Stability Program, 2013)
8,0
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
4.4 Pros and cons of the devolution process and the
impact of the crisis
• Successful devolution of powers and positive citizens’ perceptions
until the crisis.
• General Financing System: strong redistribution among Communities
and Re-ranking, slow process of tax decentralization, poor level of
accountability and problems of coordination.
• Privilege of the Charter System (against some constitutional
principles) and comparative grievance (demand for Fiscal Pact in
Catalonia).
• Process of and demands for “recentralization” in some regions as a
consequence of the economic crisis and, in parallel, demands for
independence in Catalonia.
5. Territorial tensions: The Catalonian case. Main facts
• 1978: New Constitution: the State of Autonomies 1979: Approval of
Statutes of Catalonia and the Basque Country. Similar competences but
different financial system.
• More than 30 years of development of the SA.
• 2005 The process of reform of the Catalonian Statute begins.
• 2008: Severe economic crisis in Spain.
• 2010: Sentence of the Constitutional Court (31/2010). Huge
demonstration against it in Barcelona: “We are a nation, we decide”.
• 2010: New nationalist Government in Catalonia. “Fiscal Pact Proposal”.
• 2012, 11th September: About 1 million people in the streets, behind the
slogan, “Catalonia, a new State in Europe”. President Mas decides to call
for General Election, after trying to discuss the Fiscal Pact with Mr Rajoy.
• 2012, 25th November: Results: Nationalists: 74 out of 135 seats.
• 2013, 23rd January: Statement of Sovereignty of Catalonia (85 votes) and
proposal of referendum.
5. Some explanations: Catalonia singular characteristics
• One of the richest and industrial territories in Spain.
• Particular history, marked by the defeats of 1714, language and culture
differentiate it from the rest of Spain.
• Strong Nationalist Parties (CiU, ERC) and other social institutions, that
try to mark differences (ethnics, culture, language,..) with the rest of
the state.
• Deficit of the Fiscal Balance (too large for the nationalist parties),
serious incidence of the Crisis in the AC and Comparative grievance in
respect to Foral Regions.
• Frustration with the new Statute of Autonomy and the CC Sentence,
the spark which ignited the fire of demands for independence.
6. Last comments: Final reflections and perspectives
•
1. The crisis, as a great recession among the countries of the south of Europe.
•
2. Spanish Public sector and public finance show an intermediate level between the
most consolidated WSs in Europe and the new EU members.
•
3. Collapse of revenue, growth of expenditure stabilizers, the financing of the
financial sector debt and others, and the increase of debt risk premiums have made
grow the fiscal deficit and debt.
•
4. The restricted policies applied to combat fiscal disequilibria have increased the
recession and unemployment with no perspectives of change. The lack of a real
Central Bank and more coordinate economic policy make more difficult the solution
•
5. The government has initiated some reform processes (labour market and others)
without success. Inequality and poverty have increased and so social instability.
•
6. Process of decentralization of deficit and debt, and more predominance of the
central Government economic policy. Demands for “recentralization” in some
regions and for independence in Catalonia,