Economic freedom in Spain and its regions

Summary:

On 19 April 2023, the Rafael del Pino Foundation and the Civismos Foundation organised the meeting Economic freedom in Spain and its regions, with the participation of Francisco Cabrillo, Javier Fernández-Lasquetty and John Müller, on the occasion of the presentation of the book by Francisco Cabrillo, Professor of Applied Economics and Public Finance at the Complutense University of Madrid, "Economic freedom in Spain: why are some Spaniards freer than others?

According to Cabrillo, the idea is to analyse the performance of Spain's seventeen autonomous communities in terms of the role of the public sector in its dual role of regulating the private sector and its size in terms of public revenue and expenditure. There are not many indices of this type in the world because, for this to make sense, regional or local governments must have a significant level of autonomy, as this greatly conditions the way in which the index is compiled. States in the United States, for example, can regulate the labour market, so that element must be included in the US index. In Spain, however, labour regulation is national, so this aspect is not included in the index.

There has been talk of national indices of economic freedom, of Spain's mediocre position. The problem is not that we are far from the most prosperous countries in Europe. The problem is that, if we look at the evolution of GDP per capita in terms of purchasing power, Spain has been losing weight very significantly and, in recent years, has been overtaken by Eastern European countries that already have a higher GDP in terms of purchasing power than ours, such as Estonia, Latvia and Slovenia. All of them are significantly better placed than us in the index of economic freedom.

France, which is even worse than us in the ranking, is a much richer country. But a country's position in per capita income derives from very long processes over time. What this type of index means is how the evolution is taking place. The differences with France are narrowing and, in the case of Spain, they are clearly overtaking us.

This type of study allows us to analyse the variables separately. If we look at Spain's position and analyse where there is more freedom, it has more freedom in international trade and monetary stability, in freedom of investment. However, it has consistently poor results in the public sector, solvency and public spending, taxation, the labour market and the judicial system.

If we analyse these variables in a decentralised state, we see that many of them are conditioned by central government policies, but others are not. The autonomous communities play a very important role in them.

The study is comparative. That is, let's imagine the public debt/GDP ratio. It is possible for that ratio to grow and yet for a country to improve. That is why this index is a comparative index. This index is usually made with data from two previous years, but, in this case, it has been made with data from 2019 in order to avoid distortions caused by the pandemic.

The index is based on twelve indicators, classified into two groups: regulatory indicators and public sector indicators. The regulatory indicators are trade, education, environment, mobility, health and housing. In trade, these are administrative barriers to carrying out commercial activities. Madrid has the least and Catalonia has the most. Education measures the relative weight of private and subsidised education. Here, tradition has a great impact on the regions that occupy the first places: La Rioja, the Basque Country, Madrid and Navarre. In environment, Catalonia is the most interventionist and Castile-La Mancha the least. Madrid is in fourteenth place because it has quite a lot of regulation.

The mobility section measures whether there are incentives to move around and engage in economic activities. The list is headed by the Balearic Islands and Madrid. The Basque Country, which has traditionally been an area that has received a lot of immigration and many entrepreneurs, but this slowed down many years ago, stands out.

Healthcare includes private healthcare as a percentage of public healthcare and some regulations. Madrid is in a low position, fourteenth, because it has quite a lot of public healthcare. Then there is the regulation of pharmacies, where there are other regions that have more regulation.

The last indicator is housing, which refers to social housing in relation to total housing built. Madrid is in last place because there is a lot of social housing. Madrid has a lot of public health and a lot of social housing.

There are six other indicators of the size of the public sector: public expenditure, fiscal effort, public debt, public employment, taxes and transfers. Here, Madrid's position is clearly the best, and by a wide margin. The first variable is public expenditure of the autonomous community over the GDP of the autonomous community. The second is tax effort, which is basically tax burden weighted by per capita income, which is a more realistic version of tax burden. Germany has the same tax burden as Spain, but per capita income is higher. So you have to consider what the effort is and weight it by income. Again, Madrid has the lowest tax burden.

In terms of public debt, we are talking about the public debt of the autonomous community as a percentage of the autonomous community's GDP. The best are the Canary Islands and Madrid and the worst is Valencia, which has serious problems of economic deterioration, although in terms of public debt it has been bad for many years.

Public employment refers to regional government employees, not to the total number of public employees. Here, Madrid has the third lowest number of public employees, and the regions with the highest numbers are Extremadura and Asturias.

In taxes, data are taken from the Register of Economists and Tax Auditors. For the index, the taxes of the autonomous communities are taken: income tax, inheritance tax, transfer tax and wealth tax. A model is made with them: a person with two children, with an income of so much, who has inherited from his father I don't know what, etc., in what situation he finds himself. Madrid is where the least taxes are paid and Asturias where the most.

Finally, there are the transfers, that is, how much of the public spending is distributed among groups. Navarre gives a lot, it has a very large expenditure in this respect, while Madrid gives the least.

All these data are coordinated and an attempt is made to arrive at a result, which is the index of economic freedom. Madrid ranks number one, very highly, followed by the Basque Country and La Rioja. Asturias and Extremadura are again in a very bad situation. Valencia, which was not in this situation, has fallen to 15th place. Navarre has also deteriorated. Catalonia is in an intermediate position. Andalusia has improved.

With these data, two reflections can be made. The first is that it is often said that in Madrid taxes can be lowered because they are rich, but those who are poor cannot do so because if taxes are lowered, there is no money for hospitals, there is no money for schools, there is no money for anything, so it is normal to charge more taxes. In the end, it's a vicious circle because if they keep raising taxes, there will be nobody willing to invest in the autonomous community.

Moreover, this theory does not correspond to what we are seeing in Eastern European countries, which are developing strategies to attract investment. If they get someone who is considering investing in Germany to invest in Lithuania, this favours Lithuania. It is not like what is happening in the United States either. There is nothing to indicate such a correlation; on the contrary. The two freest states are New Hampshire and Florida. New Hampshire is in New England, where there are many states that have very high levels of regulation, but this is not the case. The worst ranked states are New York, which is hugely interventionist, and, interestingly, Delaware, which has a large degree of intervention. If we go to the equivalents of Andalusia or Extremadura, we have Utah, Idaho, South Carolina, South Dakota, Montana. These states are not exactly the industrial and research centre of the country. However, these states have much greater systems of freedom.

A second thing is the application of partisan theory, which is to ask to what degree and to what degree policy is conditioned by whether one party or another is in government, and whether this is more pronounced at the regional level or at the state level. The conclusion of the studies in Germany is that there are greater differences in the policies of the Lander than in state policy, because there is greater conditioning: there is a consensus on macroeconomic policy and a series of international conditioning factors. While the Lander, who are responsible for social spending, have a greater degree of autonomy. There is no similar study for Spain, but it is interesting for the purposes of this type of study to see how this type of policy with less external conditioning can demonstrate the will to do something different along a specific line.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of their authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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