Effects of Catalan fiscal deficit

Macroeconomic effects of Catalan fiscal deficit with the Spanish State (2002–2010)

by Jordi Pons-i-Novell and Ramon Tremosa-i-Balcells

Centre d'Anàlisi Econòmica i de les Polítiques Socials, 
Facultat de Ciències Econòmiques, 

Universitat de Barcelona (UB)

In recent years Catalonia has ceased to be the most dynamic Autonomous Community (AC) in the Spanish state. Catalan economy, which was traditionally considered the 'factory of Spain' in the 19th and 20th centuries, shows that at the beginning of the new century tourism and construction has replaced industry and services in Catalan productive structure. Thus, in 2000 Navarra was the first Spanish AC considering the percentage of employment engaged in the highest value-added manufacturing sectors. At the same time Madrid was the first Spanish AC, when considering the percentage of employment occupied in intensive knowledge services (Eurostat, 2002). This fact can be attributed mainly, among other reasons, to globalization impact on the Catalan economy (Vives, 2002) and to the actual political structure of the Spanish state: the limited autonomy of Catalan government can not hold up the continual fiscal deficit with the Spanish state and implies the non-existence of a real regulating Catalan power over economic activity. 

Considering the first reason mentioned above, it is important to notice that the EU enlargement process implies that Catalan industry is beginning to lose some of its most labour-intensive manufacturing sectors. It has been estimated that half of Catalan manufacturing sectors will be seriously affected by the removal of multinational investment and production to EU candidate countries and other emerging countries (Gual, 2002). On the other hand, the non-existence of a real regulating Catalan autonomous power implies that regulated activity sectors move from Catalonia to Madrid. For example, to be near the real and effective policy-maker, the Catalan pharmaceutical industry is relocating to Madrid, where financial services and multinational central offices have been concentrating in recent years.

However, EU enlargement is not necessarily bad for the Catalan economy. For example, some multinational investment which since 1986 have been choosing Catalonia, will relocate to the emerging countries; in this instance Catalan integration in the EU has been extremely positive for Catalan industry. Thus, as a supplier of large industrial multinationals, there have appeared in Catalonia thousands of small and medium size Catalan manufacturing enterprises. And even some of these, having increased their size, have become Catalan industrial multinationals which invest abroad (Fontrodona and Hernández, 2001). In this way, 1999 was the first year in which Catalan industrial investment abroad was larger than foreign industrial investment in Catalonia (Molina, 2002). Thus, the European economic and monetary integration process would have specially benefited Catalan economy: from 1993 the convergence in interest rate (which remained at 15% during the period 1988–1993) and the peseta's depreciation (which was artificially appreciated in that period) would principally have benefited industrial and exporter Spanish regions as Catalonia. This benign monetary policy executed in Spain since 1994 would have had a significant unequal territorial effect (Tremosa and Pons, 2001), which at the same time would have been the main reason for the spectacular growth of Catalan exports between 1994 and 19981 (Costa and Tremosa, 2003).

On the other hand, and in spite of Catalan autonomy, the centralism of the Spanish state negatively affects the Catalan economy. Fiscal policy is still concentrated in European States, and Catalonia is a 'richer region' of a 'poor country'. With a GDP per capita of 99% of EU GDP per capita average in 2000, similar regions in France are net receiver regions of EU funds and French State funds, while Catalonia is a net taxpayer in the EU and in the Spanish state. Thus, there are interterritorial redistribution policies of the Spanish state that affects specially Catalan economy, which has been continuously its main AC contributor. In this way, there is a significant academic consensus in Spain, considering that fiscal imbalance of Catalonia with the Spanish state has supposed a systematic outlay of wealth estimated between 7–9% of Catalan GDP in recent years (Castells et al., 2000). Spanish public investment in Catalonia has been, in the last 50 years, lower than the Spanish average (Castells, 2002).

Table 1. Catalan fiscal deficit with the Spanish state–fiscal
deficit in current million euros

Year     %     GDP Deficit

1986    7.5    2722.6
1987    8.0    3269.5
1988    7.3    3359.6
1989    8.9    4687.9
1990    8.8    5180.7
1991    8.9    5745.7
1992    7.5    5198.8
1993    4.5    3185.4
1994    6.0    4627.8
1995    5.6    4693.9
1996    6.3     5607.4
1997    8.1     7723.0
1998    7.8     7969.4

Sources: 1986–1994, Colldeforns and Martínez (1999);
1995–1998, López and Martínez (2000).


Year    %     GDP Deficit

1995    0.9    700.6
1996    2.2    1871.2
1997    4.9    4390.0
1998    5.4    5194.0
1999    7.7    8032.9
2000    8.8    10 035.4
2001    8.9    10 746.4

Source: Alcaide and Alcaide (2002).
Note: Catalan GDP data is not exactly the same as provided
by IDESCAT.


Table 2. Regional GDP per capita in the EU and candidate
countries in PPS (Purchasing Power Standard)–EU-15
average^100

                          1996     2000

Madrid                  101     110
Navarra                  98      105
Basque country      92      101
Catalonia               99       99

Source: Eurostat (1999, 2003).