OVERVIEW OF FISCAL DECENTRALISATION

Spain consists of 17 autonomous communities (Comunidades Autonomas, CCAA), 50 provinces, 8,131 municipalities and two autonomous cities. It is a highly decentralised country with a significant share of spending powers devolved to the CCAA.

Legal acts governing fiscal decentralisation

The Spanish Constitution of 1978 ensures the right of self-government to the CCAA and considerable financial autonomy. It also grants provinces and municipalities autonomy in the management of their respective interests. The Royal Legislative Decree 2/2004 set the basis of the local financing system. The CCAA are divided into two groups ruled under the ordinary regime and the foral regime. Social security, however, is the responsibility of the central government (Article 41 of the Constitution). Major fiscal rules were set in the Budgetary Stability Acts of 2001 and 2006 and recently in the landmark reform of 2012 which included an amendment to the Constitution, limiting the borrowing capacity of the CCAA.

Qualifying fiscal decentralisation

In 2018, excluding social protection expenditures, sub-national spending accounted for 79% of total government spending, an increase of 3% over the previous 6 years. In line with the subsidiarity principle, the central government retains full autonomy in areas such as foreign policy, defence, justice, currency, and general standards of the health care system. Shared and devolved competences regard the provision of services in the fields of environmental protection, economic affairs (e.g. transport and communication), housing and community amenities, health, education and social protection.

At the same time, a high degree of fiscal autonomy is also granted on the revenue side to the CCAA and local governments: in 2018, shared and transferred taxes accounted for 36% and 51% of the CCAA and local government total revenues, respectively. The CCAA are divided in two main groups: those under the ordinary regime and those under the foral regime (namely, Navarre and the Basque Country). The CCAA under the foral regime enjoy full fiscal autonomy (excluding custom tariffs) under the condition that the overall effective tax burden does not fall below that of the rest of Spain. The ordinary regime sets the limits and the modalities under which tax revenues are shared between the CCAA and the central government: 50% of the personal income tax with normative discretion on regional rates, 50% of VAT with no discretion on regional rates, and 58% of duties on manufactured production of alcohol, tobacco and hydrocarbon. The CCAA retain 100% of the revenues and some normative discretion over the rates of the taxes on electricity, hydrocarbon oil retail sales, electricity, property taxes, stamp duties, motor vehicles, wealth taxes, inheritances and gifts.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

In Spain, sub-national expenditure’s share of total government expenditure was 51% in 2018; that of the CCAA amounted to 36%, and provinces and municipalities to 15%. While the share of provinces and municipalities has remained almost the same since 2000, with a slight increase since the 2008 financial crisis, the share of the CCAA has fluctuated over the years since then. This was caused by the austerity actions of the central government and the impact of social expenditures. Expenditures of the CCAA have since become relatively more significant.

Fiscal equalisation mechanisms

A fiscal equalisation mechanism among the CCAA is in place through the Guarantee Fund for Essential Public Services in order to guarantee uniform access to the essential public services of the welfare state (namely, healthcare, education and social services). All the CCAA contribute 75% of their tax revenues to this fund and the resources collected are redistributed according to the “adjusted population” criteria (a formula that balances different regional statistics such as population, area, dispersion, insularity, protected population, and elderly and youth share). 

LEVEL OF FISCAL DECENTRALISATION

In Spain, the authorities of the CCAA have a moderately high degree of fiscal autonomy. In terms of revenue autonomy, around 41% of the revenues of the CCAA (excluding the local level) originated from own financial resources in 2018. Of the four countries with a distinct sub-national state level (Austria, Belgium, Germany and Spain), Spain has the second highest level of revenue autonomy after Germany, which was 82% in 2018. While Spain’s CCAA’s revenue autonomy is significant, it is still below the “EU” average but this is largely because the significant economic weight of the German Länder skews the average upwards.

Similarly, local governments have a high degree of revenue autonomy (59% of the revenues in 2018), which means a fiscal imbalance (captured by the composite ratio) and transfer dependency that are lower than the EU average. There appears to be a notable impact from the crises on the indicators. Revenue autonomy at the local level had been falling gradually since 2000 from 59% but saw a sharp decline during the global financial crisis when it reached a low of 49% in 2009. Since then revenue autonomy has increased and from 2012 the figure has remained fluctuating around the average of 59%. Comparing these figures to the rest of the EU, the revenue autonomy at the local level was higher than the EU average by 8 percentage points between 2012 and 2015. This followed an increase from 1 percentage point in 2009 and has since fallen to 6% in 2018.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.

The CCAA’s own revenues as a share of total government revenues (‘own revenue decentralization’) are higher than the EU average. In 2018 it was 15% compared to 7% at the EU level. The share of own revenues for lower level local authorities was 9% in 2018. This means that total sub-national decentralised revenues account for around a quarter of total revenues in Spain, which is high by EU standards (an average of 13%).

Spain is characterised by relatively high local government revenue autonomy, with a sizeable share of tax receipts and fees transferred to sub-national governments. As noted earlier, shared and transferred taxes to the sub-central governments (SCGs) amount to 36% and 51% of total consolidated government revenues, respectively.. At the same time, SCGs enjoy a high regulatory capacity over both shared and transferred taxes.

The CCAA had full autonomy over defining the transferred tax rates amounts for 92% of revenues, while taxes set jointly between the central government and the CCAA authorities account for 3% of revenues. Local entities (provinces and municipalities) have more restricted power over taxes: they have restricted discretion over setting rates for 51% of their revenues, and full discretion over setting rates and reliefs for 30% of revenues.

Fiscal rules and borrowing capacity

Spain had difficulties controlling the indebtedness of the state and the sub-national authorities. The CCAA also had substantial leeway to decide their levels of indebtedness and deficit. The deepening of the crisis led to a reform of Article 135 of the Constitution in 2012. This article, which originally simply expressed the limits for the central government to issue debt, now regulates the overall debt and deficit levels for the government as well the sub-national authorities. It allows for the budgetary stability rules for all levels of governance to be set in “organic laws”, thus allowing for relatively easy amendments when required compared to constitutional rules. The organic law establishing a new Budgetary Stability and Financial Sustainability Pact entered into force on 27 April 2012. While this law does not curb the financial independence of the sub-national authorities within their competencies, it does limit their levels of deficit and debt.

Deficit and debt at sub-national levels

According to Eurostat data, in 2018 the CCAA had a gross debt of 24.3% of GDP. This is a slight decrease from the peak of 24.8% in 2016. Deficits in the CCAA increased around fourfold since the 2008 global financial crisis and in the aftermath of the euro area crisis. In 2007, CCAA debt levels were at 5.7%, the lowest level since 2000. This mirrors the large increase in central government debt from 39.7% of GDP in 2008 to a peak of 100.7% in 2014 according to Eurostat. The level has since fallen to 97.6% in 2018.

The figures also show a rapid decrease since 2011 of net borrowing as a percentage of GDP, in line with the consolidation efforts. The entry into force of the new budget stability law has most likely played a considerable role curbing these relatively high levels of borrowing.

 
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA 

Expenditure indicators

In the area of expenditures, the level of discretion is high for both the CCAA and provincial and municipal authorities. In Spain, CCAA governments have extensive competences in many general public services, and very extensive competences in health (92% in 2017), education (91% in 2017) and general public services (44% in 2017). The expenditures of the CCAA in health and education are higher than the other federated states in Europe. The three items listed above dominate the distribution of expenditure in the CCAA budgets.

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.  

Provinces and municipalities

Given the share of expenditure at the level of the CCAA governments, the lower levels of government have rather low expenditure shares (below the EU average). The exception in 2017 was general public services (38%), public order and safety (25%), and recreation, culture and religion (60%). As a share of the local budget, the highest goes to general public services (above the EU average, although this is due to the low levels of expenditure at this level of governance in non-federated states).

Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.