Francisco Velasco Caballero (coord), Félix D. laguna Martínez, César Martínez Sánchez, Félix Vega Borrego, Diego Marín-Barnuevo Fabo, Ester Marco Peñas, Instituto de Derecho Local, Universidad Autónoma de Madrid
Relevance of the Practice
Rural areas face three enormous demographic challenges nowadays: depopulation, ageing and dispersion. These three factors impact negatively on municipal budgets. On the one hand, depopulation and ageing reduce tax revenue as they usually imply an economic downturn. On the other hand, the dispersion of population typical of rural areas, added to the increasing depopulation and ageing of several central regions of the country, may (and do) increase the cost of providing public services.
Description of the Practice
Having this in mind, the relevant practice relates to the insufficient attention paid to specific demographic issues (e.g. depopulation, dispersion and ageing) by the state within its financial transfer scheme. This reality lead to the undercompensation –if any– of the existing differences between large Spanish municipalities, which increase in population, and small and medium municipalities, which otherwise age and decrease in population.
Moreover, the unequal treatment of large and small (and medium) municipalities related to the already mentioned disregarded factors of depopulation, ageing and dispersion might even worsen taking into account the participation (approx. 2 per cent) of large municipalities (98) on state tax revenue collected in each large city (e.g. VAT and Personal Income Tax). This extraordinary revenue is based on three variables: total population of each city (75 per cent), average tax effort (12.5 per cent) and the inverse of the ability to pay or fiscal capacity (12.5 per cent). Theoretically, whereas the last variable refers to the broadness of tax bases, the second one refers to the tax rate set by each municipality. Small Spanish municipalities (8,026) do not receive these extraordinary revenues and this might exacerbate the unbalancing effects of the insufficient recognition of dispersion and ageing in the implementation of the general financial transfer scheme.
Assessment of the Practice
Under the Spanish legislation, local governments are required to provide certain services according to their size. Therefore, the main purpose of the financing system is to assign sufficient financial resources to local governments so that they may comply with that obligation.
However, insufficient recognition of depopulation dispersion and ageing within the financial transfer scheme might allow considering that the general financial system does not aim at an actual leveling between local governments. Indeed, it can exacerbate the divide between rural and urban areas. The following provisional conclusions could be drawn from recent empirical studies:
- cities of more than 500,000 inhabitants are over-financed (due to the status quo clause);
- there are enormous – and unjustified – differences regarding per capita financing (e.g., Barcelona receives EUR 701 per inhabitant, while Almeria receives EUR 227);
- unlike the financing system for autonomous communities, the current local government financing system does not address the main problems of rural municipalities: population decrease, ageing and dispersion;
- the system does not take into account the effective costs of service provision either, which may adversely affect rural municipalities, where public services are more expensive (due to the lack of diseconomies of scale).
Notwithstanding this assessment, it must also be taken into account that the second tier of local government (the provinces) is obliged by the laws to provide the municipalities with financial and technical assistance, what partially rebalances the comparative underfunding of small -and mainly rural- local governments.
The workshops and interviews conducted for this ‘relevant practice’ show that the current local financing scheme ensures the provision of mandatory local services (water supply, sewerage, maintenance of public roads, etc.). In relation to this general conclusion, three important clarifications are necessary.
First, although demographic aging naturally results in a higher cost of public health and care services, this phenomenon does not necessarily produce an imbalance in local financing, since the provision of those services corresponds mainly to the autonomous communities, not to the municipalities.
Second, rural inhabitants do not receive any favorable treatment from the local financial system. Although the fiscal capacity of small municipalities is normally smaller than that of large municipalities (due to lower wealth rates and less economic activity), public services in small municipalities are also largely financed by local taxes. Consequently, the local tax burden on the inhabitants of rural areas is very similar to that of the inhabitants of urban municipalities.
Third, the rural neutrality of the local financial system is partially offset by the technical and financial assistance and cooperation of the provinces (second tier of local government). However, this compensatory effect is very different among the 50 provinces. The workshops and interviews carried out in this relevant practice show that some provinces concentrate all their economic and personal resources in rural municipalities (as it is the case of Valladolid), while other provinces (such as Barcelona) allocate a significant part of their income to urban municipalities, so that rebalancing effect with regard to rurality is less relevant.
References to Scientific and Non-Scientific Publications
Bosch Roca N and Suárez Pandiello J, ‘Politics and Finance in Spanish Municipalities’ (2015) 212 Hacienda pública Española 51
Echániz Sans J, ‘Los Gobiernos locales después de la crisis. Un Análisis de las Haciendas Locales en el período 2001-2016’ (Fundación Democracia y Gobierno Local 2019)
Ministry of Finance, ‘Publicación de los de los Presupuestos de las Entidades Locales’ (2021) <https://www.hacienda.gob.es/es-ES/Areas%20Tematicas/Administracion%20Electronica/OVEELL/Paginas/PublicacionPresupuestosEELL.aspx>