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28 July 2014

To Hide a Huge Deficit

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Minister Montoro and his employee Ángel de la Fuente, former researcher at the Spanish National Research Council (CSIC) and the UAB (Autonomous University of Barcelona), have finally published their "territorialized accounts". After a first reading, these are my reactions.

First. It is not acceptable that the ministry would hide data that should be public property. Making the data publicly available would allow economists to estimate the interregional accounts using their own preferred method including the scientific methodologies that have been in use for years by academia. To hide the data and only publish "cuentas territorializadas" (literally, "territorialized accounts" 1), completely cooked by like-minded economists, is an intellectual embarrassment. In democratic countries, data belong to the citizens, not to the ministers or the king, and respected ex-academics should not engage in this kind of concealment.

Second. As I have said a thousand times, there are no good fiscal account balances or bad fiscal account balances. Each one is the right answer to a specific question.

Third. Once we have seen what De La Fuente et al have done, the question that their accounts answer is: "If Catalonia were independent and taking into account all the new expenses that it would have to cover (expenses that up until now have been paid for by the Spanish government), how much additional net money would its government have,?" The answer: at least 8,455m euros which is the result of De La Fuente's study. Not bad! It's relevant to know that, in an independent Catalonia, the government would no longer struggle to make ends meet and would be able to stop worrying over how to pay for health and education. Thank you, ex-professor De La Fuente, for the information.

Fourth. As we know that De La Fuente and his assistants have done everything within their ability to make this deficit figure as small as possible (Montoro already confessed that the goal of these accounts is political: to give no ammunition to the Catalan independence movement!), we know that the surplus of an independent Catalan government would probably be well over 8,455m euros.

Fifth. With independence, the additional money that the Catalan government will have is not all the additional money that Catalonia will have. The reason is that the government will have to pay many bills that were previously the responsibility of Spain, and from now it will be Catalonia's. The answer to the question "How much additional money will Catalonia as a country have, in the event of independence?" is "the resulting total of the fiscal balance as calculated by the cash flow method". As De La Fuente has not done these calculations (and this is where the honest, respectable economist that Ángel once was loses his respectability, because an academic like him should not engage in data concealment schemes), we can use the data from the Catalan government: if Catalonia were independent, its GDP would soar by 16 billion euros because all the tax money that Catalonia loses as a result of being in Spain would then stay in the country.

Sixth. The calculations of De La Fuente and his colleagues assume that public expenditures that cannot be assigned directly to territories, and those that take place in Madrid benefit all of Spain's citizens in the same way. Does the Prado Museum really benefit Catalans significantly? Does it benefit us to the same extent as it does the residents of Madrid (who live nearby and can visit it more frequently), or those in Extremadura? What about the salary of the king? Does it benefit monarchists and republicans alike? What about the salary of Minister Wert? Does his salary benefit equally someone who wants schooling in Catalonia to be entirely in Spanish and those who want their children to be schooled in the Catalan language? Paul Samuelson taught us in his 1954 seminal paper that we should estimate the "marginal utility" enjoy by each taxpayer from each public good supplied by the government. The truth is that it is nearly impossible to know who benefits from each euro spent by the State. And because it's so difficult, De La Fuente makes a bold and arbitrary assumption: all public expenditure benefits everyone equally. Clearly this is a gratuitous assumption, as the salary of the king could never benefit a republican in the same way as it benefits a monarchist, and the salary of a minister who attacks the Catalan language cannot benefit Catalans and non-Catalans alike. But if we do as De La Fuente and assume that public expenditures benefit all citizens in the same way, then 16% of the total expenditure made in Spain is made for the benefit of Catalans, as Catalonia represents 16% of the Spanish population. I must emphasize that this is an arbitrary assumption, although De La Fuente would like to give it an impartial scientific nature that it doesn't have. It would be equally scientific to say that the expenses that do not benefit Catalans (like the salary of ministers Montoro and Wert) should not be imputed to Catalonia.

Seventh. The accounts regarding the Madrid region are a joke. To claim, as has the Madrid president, that the Spanish fiscal system is "twice as damaging" for his region as it is for Catalonia, is a farce. As I have said, De La Fuente's calculations assign to other regions the bulk of the expenditures made in Madrid. This is independent of whether these expenditures are made in Madrid, generate business in Madrid and have a macroeconomic impact in Madrid. According to De La Fuente, 85% of those expenditures are made for the benefit of "non-Madrid residents" and, as such, are not assigned to Madrid despite being made there. And, of course, if the people of Madrid pay the taxes that they owe, and 85% of the expenditures made in Madrid are assigned to other regions, it looks as if they pay a lot and "receive" little in return. The result? A gigantic fiscal deficit, which prompts no end of people in Madrid to claim that they are the ones who suffer the most! This is not true because, indeed, these expenditures are made in Madrid and, therefore, benefit the economy of the capital and its citizens!

It's as if a group of 17 friends organize a party in your restaurant. You charge everyone in proportion to their income, and as you, the owner of the restaurant, are the richest, then you pay the most. Your Catalan friend is the second richest, and as such pays the second most. And so on. If you only look at what each of you pays without accounting for the business that the restaurant does with the party, it turns out that you, the owner of the restaurant, are the one who pays the most. You can't argue with that. But what you cannot do is claim that you are the most generous and supportive because, apart from what you pay, you are doing big business with the dinner party. If you take into account that this business goes to your restaurant (and this is what the cash flow method that De La Fuente and Montoro are hiding does), it turns out that you're not as generous anymore: what you pay as the share of the costs is more than offset by profits you make by organizing the party. So the same thing happens with Madrid's deficit: De La Fuente says that 85% of Wert's salary must be assigned to the rest of Spain even though, in reality, it is being spent in Madrid and benefits Madrid's restaurants and businesses.

Using De La Fuente's figures, one sees that, among the regions that do not profit from "organizing the party", Catalonia the region that contributes the most, with a deficit four times greater than the runner-up, Valencia, and almost six times greater than the third, the Balearic Islands.

In summary: from a fiscal and economic point of view, Spain continues to be a bad business for Catalonia. And the publication of the interregional fiscal accounts by Montoro and De La Fuente does not change this perception. The only thing that this publication does is that we now can see the intellectual dishonesty of those who move heaven and earth to hide a huge deficit.

1 In the original text the author mentions this concept in Spanish, while the rest of the article is obviously written in Catalan.


(1) In the original text the author mentions this concept in Spanish, while the rest of the article is
obviously written in Catalan.


This article, a translation of the catalan version, was translated and originally published by Diari Ara here.

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Starting January 30, 2012, I decided to put the random (economic) thoughts that I was posting on Facebook, in a blog. In this site you will be able to read all Facebook notes going back to 2008, (without my Friend’s comments, unfortunately), but we will only maintain the new thoughts. If you want to check out the old comments, they are still posted on Facebook. If you want to comment on them, you have two options (1) Become a Facebook Subscriber. Since all the posts will also appear in Facebook, you will be able to comment there. (2) Comment on Twitter, as each post will also be announced in Twitter.