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Tax change: a tax hell… with lower revenue. It has already been more than a year since the last regional elections in Navarra, where UPN (center-right political party) got 15 seats and the victory at the polls. However, both the regional government and Pamplona’s city council ended up in the hands of other parties. In the case of the region (Autonomous Community), it was Geroa Bai (a far-right nationalist party) and, in Pamplona, EH Bildu (a far-left nationalist party). Since then, the Government of Navarra has carried out a tax reform to increase tax collection and revenues. More specifically, this reform was estimated to increase revenue by 127 million euros in 2016 and 72.5 million in 2017.

Graph 1. Revenue, expenditure and surplus in Navarra (January-April 2015-2016)

Source: IGAE

However, contrary to estimations, up until April, revenues have not increased, but fallen by 12 million euros, decreasing 1 percent and far from the raise promised by the Government of Navarre. At the same time, we have observed an increase in public spending, which amounts to 55 million euros until April this year. This represents an increase of 5 percent with respect to the same period of the year before.

Change in the budget: from surplus to deficit

This increase in public spending, which was initially going to be financed with the expected rise in revenues —which to date has been revealed as non-existent—, has led Navarra to see the surplus that it enjoyed in the first quarter of 2015 disappear —estimated at 55 million euros. On the contrary, 2016 is seeing a deficit of 13 million.

Graph 2. Accumulated deficit until April (% GDP) by Autonomous Community (2014-2015)

Source: Ministry of Finance

This deterioration of the Navarra’s public accounts contrasts with the rest of autonomous communities, since only six of them, counting Navarra, register a worse result than in the previous year. In addition, among these six regions, they have obtained either a lower surplus (La Rioja), or a greater deficit (Andalusia, Asturias, Cantabria and Extremadura), it is Navarra that has reaped the worst results, with a drop in its surplus of 0.37 percent of GDP. Thus, while the majority of autonomous communities reduce their imbalances, Navarra heads the group of those that aggravate them.

Graph 3. Increase of public debt in Navarra(million euros)

Source: Bank of Spain

This hole in the accounts in the first four months of the year has also had an effect on public debt, whose growth rate has accelerated. While, in the first quarter of 2015, it increased by 84 million euros, in 2016 it did it by 193 million —that is, it more than doubled. If this trend of increasing expenditure and falling revenues continue, public debt could continue to rise to alarming levels.

A change in the labour market: from creating to destroying jobs

Another worrying fact about the economy of Navarra is the unemployment rate. Since the new Executive came to power, unemployment has continued to increase, from 12.55% in the second quarter of 2015 to 14.25% in the first quarter of 2016.

Graph 4. Unemployment rate in Navarra

Source: National Statistics Insitute (INE)

A rise of almost two points in the unemployment rate reverses the trend of job loss reduction that had been achieved since 2013 —year when unemployment reached its all-time high at 19 percent. In addition, this figure indicates that Navarra follows the opposite path to that of the rest of Spain, where, in the same period (2Q2015-1Q2016), this rate fell from 22.3 percent to 21 percent. As far as the business sector is concerned, the new Government has not been received with enthusiasm either. The regulatory and tax uncertainty generated twenty companies flee the region in the second half of 2016. In addition to this initial negative effect, mainly due to doubts about the actions that could be taken by the new Executive, we must also consider the reduction of the number of companies incorporated in 1Q2016: 1.3 percent fewer than those created in the same period of the previous year. The decline occurred just as the tax reform began to be applied, raising the corporate tax to 28 percent.

Graph 5. Change (%) of newly-constituted enterprises (1Q2015-1Q2016)

Source: Official Association of Property Registrars

This figure is even more worrisome because all of the autonomous communities, except the Basque Country and Navarra, registered more new companies in the first quarter of 2016 than in 2015. This has been influenced, without a doubt, by the fact that both regions are those that have the highest corporate tax in the current year: 28 percent of the general rate, compared to 25 percent of the rest of Spain. In fact, the community where more companies have been born is a neighbour of both Navarra and the Basque Country. It is La Rioja, with a 60 percent growth compared to 2015. A difference of this magnitude between neighboring territories can make many companies in the region become less fiscally oppressive, to prevent their profits from dissipating in taxes.

Conclusion

In conclusion, over the last year, Navarra’s regional government has launched a tax offensive against its companies and taxpayers, all in search of income that not only does not arrive, but that goes away. In addition, imprudent fiscal management has generated a budget hole and increased deficit and borrowing. This, together with a deterioration in employment, draws a horrific picture that highly contrasts with the trend observed in the rest of Spain.


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