Mikel Erkoreka, researcher at the Ituna Center, has published the article “The fiscal and budgetary impact of COVID-19 pandemic on the public finances of the Basque Country: the Basque system of fiscal federalism put to the test” in the journal Ekonomiaz: Revista vasca de economía. The Spanish version is also available.
This article analyzes the fiscal and budgetary impact of the COVID-19 pandemic on the public finances of the Basque Country during 2020 and evaluates the performance and sufficiency of the system of fiscal federalism regulated by the Basque Economic Agreement. The research, which has a quantitative and qualitative character, employs the tools of fiscal and budgetary analysis – focusing on deficit and public debt management.
The aim of the article is to analyze if the Economic Agreement system has withstood the impact of the pandemic, maintaining unaltered the core principles and characteristics that govern the Basque model of fiscal federalism, of which the following stand out: bilateralness in the relations between the Basque Country and the state, regulatory power and autonomy in the tax management of the Basque institutions, and the principles of fiscal responsibility and unilateral risk. The article pays special attention to the development of the last two principles, posing two key initial questions: Who has assumed the repercussions of the lower tax collection and the deficit provoked by the pandemic in the public finances of the Basque Country? Has the pandemic structurally altered the regular or normal governance framework and fiscal and financial relations that are articulated in the Economic Agreement?
In spite of the deep disturbances provoked by the pandemic in the framework of decentralized governance of the ACs in Spain, the tax regulatory power and autonomy of tax management of the foral institutions were not affected during either of the states of alarm. The Basque tax administrations continued to regulate and manage their respective tax systems, responding to the needs of tax taxpayers and financing by means of fiscal revenues the payment of the quota to the central administration, as well as the funding needs of the Basque public sector. The Basque tax administrations based themselves on the guidelines of the OCDE to adapt their management procedures, adopt extraordinary normative tax measures, and provide a swift response to the serious fiscal, economic and social consequences provoked by the crisis. At the same time, the Basque public sector as a whole made an important investment effort, articulating an immediate response to the health, economic and social crisis.
The fact that the pandemic has not structurally altered the framework of fiscal governance of the Basque Country or the schema of fiscal and financial relations regulated by the Economic Agreement, does not mean that the system has not been readjusted and adapted according to the circumstances. The financing needs provoked by the pandemic resulting from the fall in revenues and the increase of socio-sanitary expenditure, made it necessary to readjust the framework of the agreements on budgetary stability and financial sustainability in the system of the Economic Agreement.
The tax revenues of the foral treasuries of Álava, Bizkaia and Gipuzkoa, fell by more than 9% compared to the 2019 fiscal year. As can be seen below, while the fall in tax revenues of 2020 was very pronounced, the blow received was not as great as that of the year 2009, when tax revenues fell by over 12%. The fall in the section of indirect taxes (-14%) was clearly higher than that of direct taxes (-4%).
The fiscal and budgetary impact of the pandemic upset the balance of the Basque institutions’ accounts for 2020, opening up a gap between fiscal revenues and public expenditure. The evolution of fiscal revenues of the three Deputations fell much more sharply than the consolidated expenditure of the Basque Government and the Deputations, which remained at levels similar to the pre-crisis fiscal year of 2019.
In contrast to the ACs of the common regime, the Basque institutions assume immediately the repercussions on the Basque treasuries of lower revenues and deficit provoked by the pandemic.
The financing needs provoked by the pandemic resulting from the fall in revenues and the increase of socio-sanitary expenditure, made it necessary to readjust the framework of the agreements on budgetary stability and financial sustainability in the system of the Economic Agreement.
Within the channels of bilateral relations established by the Economic Agreement, the Spanish and Basque governments agreed to update and increase the deficit and public debt targets of the Basque Country – for both the common institutions of the ACBC and the foral Deputations. In these agreements it was recognized that the foral Deputations have a status of their own for the purpose of the possibility of incurring deficit and debt, which is derived from the unilateral risk that they assume in the exercise of their tax and financial power.
The updating of the stability targets guaranteed the liquidity of the system of foral financing and the fulfilment of the principles of fiscal responsibility and unilateral risk. In this way, the Basque institutions assumed, with immediate effect, the repercussions on the public treasuries of the Basque Country of the lower tax revenues and the deficit provoked by the COVID-19 crisis, taking recourse to the debt market to cover their needs of financing.
The pandemic, like other earlier crises such as that of 2008, has emphasized the deep structural differences that exist between the systems of financing of the common and foral regimes in terms of the exercise of fiscal autonomy and the principles of fiscal responsibility and unilateral risk.
The system of the Basque Economic Agreement has demonstrated a capacity for adaptation and immediate response in the management of the COVID-19 crisis, withstanding the demanding stress test that the pandemic inflicted on its public finances, and maintaining unaltered the core principles of the Basque system of fiscal federalism.
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