Non-productive public spending
15 de octubre de 2010

More than new content, this report is a tool to put the news in context, thanks to facts that data which can be found in a very summarized and easy to understand way.

The report also includes documents from other think tanks in the world, whose conclusions can be extrapolated to Spain and become a valid argument to curb the growth of public spending. Throughout the report, there will be found points on which the debate revolves around the public deficit; what is the most positive way to apply a stimulus plan; where can we reduce spending without affecting essential public services; why should we cut that expense; how the withdrawal of Roosevelt’s stimulus plan benefited the economy; the lessons we can extract from the German economy; budget cuts affecting the Eurozone; how it affects the economy to reduce taxes versus increasing expenses; how they can certain tax policies affect production; how the cuts were executed in Germany and the United Kingdom; and how raising the tax pressure to higher incomes can reduce private investment and future growth.

Public debt

Spain has suffered a significant deterioration in its level of public debt in only two years. Specifically, it went from 36.2 percent in 2007 to 50.8 percent in 2009. And all international organizations agree that there will be a further increase in 2010.

The figures to this day confirm this, since the joint indebtedness of the Central Administration, the Autonomous Communities and the municipalities reached 598,371 million euros in the second quarter —502,940 million at the same time in 2009. Only the Government is confident that the barrier of 60 percent of GDP will not be exceeded —a figure that the European Union puts as a ceiling and from which there could be tax penalties—, although the Government’s forecasts are often not very convincing.

However, this data is more favourable than the average indebtedness of the EU countries, some of which have widely exceeded the aforementioned limit. If the Executive’s forecasts for 2011 were fulfilled, the Spanish debt would remain 20 percent below the EU average, which for 2011 will be 88 percent.

How does the debt affect the 2011 General Budgets? The interests of the debt suppose a greater load in the PGE every time. In fact, 27,000 million euros will go to aid our debt in 2011 —out of a total of 122,022 million that the State has planned to spend without including the needs of regional administrations. That is, 2.3 percent of the Spanish GDP will be used to cover the obligations generated by the debt.

The path to cut the deficit set by the Government —9.8 percent in 2010, 7.5 percent in 2011, 5.3 percent in 2012 and 3 percent in 2013— will slow down the pace of debt growth as of 2011 according to the Government’s forecasts. The public debt will stabilize in 2012 at around 74.3 percent of GDP, when employment is recovering —15.5 percent of unemployment rate— and the economy rebounds to 2 percent.

Again there are economists who doubt the forecasts. Although the international scene is beginning to clear up, the Spanish economy still leaks and throws one of the least positive balances of the European Union, with a timid growth that is measured in tenths during the first quarters of the year and which, according to most analysts, will reduce for the last months. Foreign tourists who have sometimes contributed to remove chestnuts from fire on this occasion are lethargic and scattered among new destinations such as Turkey. In fact, the wide correction of the Hotel Price Index (‐8 percent in the last two years) has barely served to recover the occupation of 2008, when the influx of tourists was already beginning to reduce.

On the other hand, the internal demand does not fully recover, with the exception of the advancement of purchases due to the increase in the VAT and it has no signs of improvement in the short term. In the first place, because the government cut reduces the purchasing power of families and, secondly, because of the expected tax increases invite savings.

As for foreign trade, which is already waking up, it will be burdened by the protectionist measures that many countries have used to prevent aid to national industries from flowing to foreign countries. In addition, the inflation difference of one tenth with respect to the European Union will reduce Spain’s competitiveness in the common market, where most of our exports go.

The German recovery could even be a risk, since if the European Central Bank raised interest rates to prevent the European locomotive from derailing due to high speed, as it could further contract the incipient demand of the lagging countries, such as Spain. In this case, it would be hard to recover the level of tax revenue prior to the crisis. For this reason, the debt is expected to increase by 60,000 million euros next year, reaching 68.7 percent of the GDP. Thus, in just three years the debt will have grown by 30 points of gross domestic product —i.e. the bill of the crisis is close to 300,000 million euros (almost a third of GDP) and could exceed 400,000 million.

The downgrading of the Spanish debt rating by Moody’s, the only agency that still granted it the highest rank, reduces the Treasury’s ability to deal with the debt. The problem may worsen in the coming weeks, as the expiration of global public debt increases competition for funding. At the moment, the Government manages to balance the accounts, since the cost of the debt that is due now is lower than the one that is issued, but this situation will be reversed in the medium term, so maintaining the level of spending could assume mortgaging the public accounts.

At the same time, the difference between the yield of the German bond (reference today) and the Spanish public debt is nearly 180 points. It is noted how the tax consolidation measures applied by the Government in May returned the confidence of foreign investors, but if one does not keep the course firmly, hesitation could assail potential buyers, as happened when the Government took a small step back in the infrastructure cut.

Public deficit

A situation out of control

Since the beginning of the crisis, the figures of the Spanish economy turned red. Spain, which had had 5 consecutive years of surplus by 2007, suffered a large increase in public expenditure as a result of three factors: the stimulus plans to the economy, the reduction of income from taxes and the decline in economic activity. The only positive note is the reduction of the current account deficit, as citizens tend to save in the face of bad economic prospects.

This way, the trade deficit was reduced by around 30 percent in 2009 compared to the previous year, although in 2010 it worsened again. However, that did not prevent the overall result of a deficit of 11.2 percent of GDP at the end of 2009. The forecasts for 2010 are not promising either.

Most agencies place their forecasts below those of the Government. Some entities point out that the numbers do not add up: to achieve its objective, the Government should reduce spending or increase taxes. The Government relies on its forecasts of a 1.3 percent growth, which would allow a timid recovery of income. However, no agency is so optimistic and Funcas cuts that figure in half. The last letter of the Government has been the rise of the highest tax rate in the Personal Income Tax, which will allow raising 10,500 more million between 2009 and 2010. And a subterfuge for the European Union: to present as collected the revenues from Autonomous Communities that have not yet done so, which allows them to reduce their deficit forecasts by 2.5 points.

Objective: 3 percent of GDP

Controlling the deficit is one of the Government’s primary objectives since the issuance of debt in May increased to alarming levels. After a wake up call by the European Union, the Executive stablished a spending cut worth 15,000 million euros. It was not enough to meet the Maastricht criteria but it reassured the markets: the Spanish debt stood at 144 basis points of the German bond on May 24. Already in July, the publication of the stress tests to the banks reinforced the good perceptions around the Spanish economy. However, the cost of financing the debt already issued weighs as a slab on the recovery of the economy. In June, 2.3 percent of public spending was expected to be used to pay interest, which is 33 percent more than the previous year and grips investment possibilities.

The objective of the Government is to reduce the deficit in 2013 to 3 percent; the maximum stipulated in the convergence criteria for the Eurozone. This limit already existed in the 90s, but until the current crisis no measures have been proposed to make it effective. Throughout the year, the European Commission proposed coercive measures based on the subsidies that each country is entitled to receive. This way, the great powers of the EU would continue to have room for maneuver in their budgets while small countries would have more incentives to be rigorous.

Challenges after 2013

After the immediate exit from the crisis, new long-term challenges arise to consolidate the reduction of the public deficit. First, the reintegration of the long-term unemployed when the economy is healthy. At this moment there are more than one and a half million people who have been searching for a job for more than a year. And this amount could become two million by the end of this year. This implies the loss of human capital, either because it migrates or due to the lack of opportunities to gain work experience.

Secondly, it must be borne in mind that a large part of the public debt in recent years has been financed through the surplus in the Social Security accounts. For example, in 2008 about 13.3 percent of the debt was in the hands of the ‘pensions’ piggy bank’. However, this situation can be maintained neither in the short term —due to the loss of the business fabric— nor in the long term —due to the increase in the number of retirees. It is expected that the trend initiated in 2009 —when the debt that the public administrations had decreased to 13 percent of the total— will continue in 2010 (with 12.9 percent) and then it will gradually worsen.

Finally, the recovery of some countries of the European Union, such as Germany, hangs on the public finances of the laggards. When the European locomotive returns to full speed, the equity market will become more attractive to investors, which will divert financing to more dynamic companies and impose a cost overrun on Spanish debt that in turn would penalise, via taxes, the competitiveness of the country, in case it has not been reduced by then.

Public spending

Returning trust to international markets, on which Spain depends so much to place its debt and access credit, depends on the confidence that the Spanish economy is capable of generating. And more so at a time when the predictions of growth do not look good. To do this, it is essential to tackle the public deficit and comply with the 3 percent reduction commitments for 2013 acquired by the Government with the European Union. And one of the first measures to achieve that goal is to drastically cut public spending.

Strong public spending

The economy was doing badly, and the Executive came to rescue her. Thus, in recent years, fiscal stimulus plans have triggered public spending to levels impossible to assume for a country where revenues plummet. Keeping workers in the construction sector active through the Plan E cost 13,000 million euros between 2009 and 2010, while extra aid for the long-term unemployed costs about 1.3 billion per year.

The figures of other ministries were also dizzy. In order to maintain the occupation in the construction sector, the Government and the Autonomous Communities boosted the cost of housing rehabilitation in the Zurbano Pacts, so that the employment of labour would be intensive —56 jobs for every million invested— and energy efficiency would improve. Thus, the aid portfolio of the Ministry of Housing reached 1,400 million in 2010. Among the remaining sectors, the automobile sector stood out, where the Executive approved an aid of 2,000 euros for the purchase of low-polluting cars. The amount of the first tranche of aid cost a total of 200 million to the administrations, although it was later expanded.

These measures were sustainable because public debt was at very low levels (below 40%) and investors were suspicious of the stock market, so they tended to shift to the shelter of state bonds. In this context of strong public spending, the May cuts led by the Government arrived. These, which meant a saving of 1.5 percent of GDP, already provided for 2010 a cut in aid and pharmaceutical expenditure of 825 million euros (which in 2011 is expected to reach 2,200 million euros). Other cuts in personnel expenses, pension freezing, etc. were undertaken. Compared to the measures taken in May, since they work with the financing in advance according to the forecasts for several years and the cut in expenses has not been completely transferred to the Territorial Administrations, at the time the money was set for transfers the crisis had not yet begun.

The Government thus managed to send a good signal to the foreign investments; assuring that it was enough to curb the momentum of the markets. Other measures promoted by the Central Administration include a 5 percent decrease in public wages, and freezing them at that level for the whole year, among other measures. To these provisions is now added a rosary of cuts in the accounts for the next fiscal year.

Cut expenses: A priority for the 2011 General Budgets

In this line of austerity, the cuts are also the main novelty of the General State Budgets for 2011. The third vice president of the Government and Minister of Economy and Finance, Elena Salgado, presented a preliminary draft on September, 30th at the Congress of Deputies, which establishes a reduction in General State Administration spending of 7.9 percent —excluding the participation of Territorial Administrations, given that the full entry into force of the new financing system of the Autonomous Communities prevents direct comparison with the 2010 data. The new accounts also provide that the average expenditure of the Ministries is reduced by 16 percent.

The General State Budgets for 2011 apply cuts for 22 of the 26 spending items in which they are divided. The only items that experience an increase are ‘Social Security Management and Administration’ (+ 22.1 percent), ‘Pensions’ (+ 3.6 percent), ‘Transportation subsidies’ (+1.9 percent) and ‘Public Debt’ (+ 18.1 percent).

On the side of the reductions, ‘Transfers to other Public Administrations’ are the policies that fall the most, with a decrease of 41.8 percent compared to the initial budget of 2010, to 42,810.6 million. After this item, the decreases in budget allocation correspond to ‘Infrastructure’ (‐40.7 percent), ‘Foreign Policy’ (‐22.6 percent), ‘Access to housing and building promotion’ (- 9.3 percent), ‘Research’ (‐17.5 percent in the case of ‘Military Development and Innovation’ and ‐7 percent in ‘Civil Development and Innovation’), ‘Senior Management’ (‐17.1 percent) , ‘Industry and Energy’ (‐13.5 percent), ‘Culture’ (‐12.3 percent) and ‘General services’ (‐12.1 percent), With a cut below 10%, the budget includes the policies of ‘Health’ (‐8.2 percent), ‘Education’ (‐8.1 percent), ‘Social services and social promotion’ (‐8.1 percent), ‘Defence’ (‐6.6 percent) , ‘Financial and tax administration’ (‐ 6 percent), ‘Justice’ (‐5.8 percent), ‘Other economic benefits’ (‐5.7 percent), ‘Employment promotion’ (‐5.5 percent), ‘Citizen Security and Penitentiary Institutions’ (‐5.3 percent), ‘Commerce, Tourism and SMEs’ (- 5.3 percent), ‘Other economic actions’ (‐4.5 percent), ‘Agriculture, fishing and food’ (‐4.3 percent) and, the slightest reduction, ‘Unemployment’ (- 1.6 percent).

In the chapter on social spending —which will be almost 60 percent of the consolidated budget for 2011—, it will increase the resources allocated to pay pensions by 3.6 percent, to 112,215.7 million euros.

Thus, once the territorial financing has been added, the limit of the non-financial expenditure of the State is 150.056 million; 18.9 percent lower than in 2010. Regarding the financial burden of the debt, this item records an important growth, which in 2011 will have 27.4 billion, 18.1 percent more than in 2010.

Increase in income

A first measure to reduce the deficit is to increase the collection made by the State. Thus, in the tax chapter, the Administration has established in the PGE 2011 an increase on income tax rates with a higher tax base. So far the maximum rate was 43 percent, which will become 45 percent from 60,000 euros per year. Above 120,000 euros, 47 percent will have to be paid as income tax. With these measures, the Government expects to raise at least about 1 billion euros a year.

Insufficient measures

However, in the opinion of many experts these cuts do not seem to be sufficient to achieve the objectives of the Executive, which are set in 6 percent for next year. For its part, the Funcas estimated at 17,000 million euros the extra cut that the Government would need to apply to channel the situation. That is, 1,200 euros per household, four times what Vice President Elena Salgado hopes to raise with the VAT increase.

Moreover, as the IMF points out, «not all economies will reduce the spending coefficient to a level considerably lower than the one registered before the crisis, which suggests that there is scope for further reductions». Only a greater austerity in the public accounts will allow to fulfill the acquired commitments and to move away from the edge of the abyss to the Spanish economy.

Government cuts are vital but these have not necessarily been made in the least important sections. For example, what is the cost of eliminating advertising on Spanish public televisions? The same would go for the savings obtained by freezing pensions.

In search of efficiency

The issue lies in knowing where spending can be productive and where not and knowing how to take advantage of opportunities. For example, the unemployment rate above 20% in a country where only 17% of the unemployed take the opportunity to train is an opportunity to offer useful courses that allow relocating the unemployed (currently the employment offices only facilitate work at 3 % of those enrolled) and increase their productivity.

A domestic example of how to encourage saving is the distribution of 21 million energy-saving light bulbs, which were distributed through a check attached to the electricity bill. The program has cost 16 million euros, but half of the Spaniards have not yet picked up their light bulb. However, if the Government fails to set the price of electricity rates and subsidise them, the citizens themselves would be concerned with adjusting their energy consumption to their real possibilities.

Some economists believe that an excessive cut could delay the exit of the crisis, while others are afraid that the debt will undermine the growth in the medium term. In any case, the most efficient destination for public policy spending is to boost the productivity of the economy, adjust prices to real production costs and reduce any obstacles for markets.

Debt of the Autonomous Communities

The party is over

One of the main tools that the Autonomous Communities have used to deal with the crisis has been the issuance of public debt. The regional administrations have pulled this resource to unexpected limits. In the first two quarters of 2010 alone, these territorial entities issued 104,083 million euros of debt; 26.5 percent more compared to the same period last year.

The Autonomous Community with the highest volume of debt in the first quarter was Catalonia, with 28,769 million euros, an amount that represents 27.6 percent of the total debt accumulated in all Autonomous Communities. However, free beer is over. For starters, because foreign investors do not want to take any risk. Thus, while the Central Administration sells its treasury bills and bonds with relative normality, the Autonomous Communities have found themselves with the tap of credit closed.

With the new measures, the indebtedness must adjust to the path of deficit reduction, so that during this year alone debt issues are authorized for a maximum amount of 2.4 percent of the GDP of each autonomous community. Nor will any operation that increases the level of indebtedness of an autonomous community be allowed until the Fiscal and Financial Policy Council (CPFF in Spanish) has not favourably informed of its rebalancing plan. Once this first filter has been passed, and at the request of each autonomous community, a first tranche of indebtedness will be authorized that cannot exceed 0.75 percent of the regional GDP.

Late measures

With the new regime, there are autonomous communities that are having a hard time, given their high degree of dependence on liquidity provided by debt issues and who do not see where to cut public spending. But these were necessary measures that, as with the cut in public spending, seem to have arrived late.

After all, it is expected that next year the autonomous communities need to borrow between 25,000 and 30,000 more million euros. An amount that is too high in a context in which capital markets are still not functioning normally. Thus, they will be forced to increase the profitability they offer by issued title, as has happened to the Generalitat of Catalonia, which will have to pay 4.75 percent to be financed a year with its recent issuance of bonds to individuals.

Almost half of this non-financial income will go to pay the imbalance corresponding to 2011 —about 14,000 million euros. The rest will refinance the debt generated in recent years. This means that the debt has been enlarged so much that even the issuance of new securities does not allow to cover current expenses. With these new issues, the public debt of the autonomous communities will be in the next fiscal year close to 140,000 million euros, compared to 110,000 million in 2010. In other words, this means that since mid-2008, the regional debt will have grown by 220 percent.

Under these circumstances, experts fear that more autonomous communities will follow the example of Catalonia and will offer debt to individuals, thus competing with savings banks (cajas de ahorro in Spanish), which do not find the financing they need in foreign markets neither. Thus, a new fighter would enter the so-called passive war: Territorial Administrations.

No room for maneuver

The plan cannot go wrong for the Government, whose powers over autonomous communities are limited to «forcing» them to cut costs/spending. If any autonomous community goes bankrupt and the Executive is forced to rescue it, its tight path of deficit reduction can become a thorny path for the national economy in the future.

Some experts, such as Andrés Rodríguez Pose, from the London School of Economics, already warn of this possibility: “They know that the state will not allow them to go bankrupt. That creates a moral hazard that ultimately poses a danger to the State”. Although there is no consensus among analysts when quantifying a supposed rescue, they do warn that the new circumstances would force the Government to raise more funds or even cut its own spending even more in a budget which is already tight, and it would put under the magnifying glass the already lowered credit ratings. The only thing that is known for sure at the moment is that there are some waiting abroad, and they look now with suspicious eyes. That is the result of decisions such as that of Fitch, which placed in August all the autonomous communities in a “negative perspective”, citing the fragile current balances and the danger of a growing debt.

Public expenditure of the Autonomous Communities

“Perhaps the greatest risk for the fulfillment of the objectives by Public Administrations arises from the possible deviations that may occur in the scope of Territorial Administrations. As it is well known and I have reiterated on numerous occasions, the high decentralisation of public spending in our country makes the contest of Territorial Administrations essential for the achievement of budgetary stability. At the end of this year it will be possible to make a complete assessment of the consolidation effort involved in the Budgets of the autonomous communities, but my impression today is that the measures announced by the majority of the them and also Local Corporations are far from responding to the reduction of public expenditure that is needed».

Those were the words of the Governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez (“MAFO”), before Congress, on October 5. His statement —where he even included the suggestion of imposing a spending limit on autonomous communities and municipalities—, provoked a tsunami of criticism that swept through the entire Spanish geography. Almost all regional entities expressed their disagreement with the position of the regulator.

However, the Governor of the Bank of Spain has said aloud what many economists and international organizations think: the effectiveness of the fiscal consolidation measures approved by the Government and the exit from the crisis depend on autonomous communities fulfilling their part. Something that, as of today, does not seem easy.

One of the reasons is that autonomous communities have remained as guarantors of basic public services, such as Education or Health, so it is difficult to adjust the budget when collection falls. In fact, almost two thirds of their budget is committed to these items. Thus, the regional margin is small, and more so taking into account the increasing amounts of non-productive expenditure destined to pay the debt placed. And it does not seem that this time the State will give them by mistake 25,500 million euros more than the amount raised, as it happened in 2009. In these circumstances, only the Community of Madrid, being one of the most dynamic, has been able to comply with budgetary stability for two consecutive years.

Objective: 1.3 percent of GDP in 2011

Last June, the Government and the autonomous communities agreed in the Fiscal and Financial Policy Council (CPFF) to reduce their deficit to 1.3 percent of GDP in 2011. To this end, they reached an agreement to reduce spending by 11,000 million euros. These modifications were the consequence of the modification of the Framework Agreement with the autonomous communities and cities with a Statute of Autonomy on the sustainability of public accounts, signed on March 22, to adapt it to the new scenario of fiscal consolidation. After this call to order, the autonomous communities are proposing for the next fiscal year budget cuts ranging between 8 percent and 9 percent.

Anyway, although this cut is the most severe since the autonomous communities were created 30 years ago, it falls short in the light of a study published by the Progress and Democracy Foundation, which states that autonomous communities «squander» 26,000 million euros in personnel and current expenditure alone. This reveals surprising data, such as the cost of each deputy in the Parliament of Catalonia, almost double that of one in Congress (505,000 euros compared to 280,000). In absolute numbers, the community that could save more money would be Catalonia, which tops this classification with 5,488 million euros, well ahead of 3,080 in Andalusia and 2,900 in Madrid, although it should be noted that the study is prepared with the budgets of the year 2008 and since then the government ruled by Esperanza Aguirre has developed several policies to contain spending.

Murcia would be the autonomous community that saves the most, since it leads all the efficiency classifications —that is, following the criteria of the study, it could hardly save—, followed by Ceuta, Melilla and La Rioja. Also, Navarra, Murcia, Extremadura and Galicia would be the most effective, while Catalonia and the Community of Valencia would be ones that waste the most. Andalusia, Castilla y León and Castilla-La Mancha would be in the group of stagnant autonomies: both their current and staff costs and their GDP decreases.

Reorganisation of competences

It is necessary to reorder regional and local powers, as stated by the counsellor of Economy and Finance of the Community of Madrid in line with the statements of the Governor of the Bank of Spain. There are many areas in which one could save: the inexplicable duplication of institutions such as the ombudsman or meteorological institutes, institutional advertising, televisions and regional radio stations, the irrational proliferation of public universities …

If all the autonomous communities were as efficient in their personnel expenses as the three best, over 12,845 million euros could be saved each year; that is, approximately 1.2 percent of the Spanish GDP. On the other hand, if in the management of the current expenses were as tight as that of the three best autonomous communities, in this item the resulting savings would rise to 13,263 million. In any case, a good starting point could be another of the requests of the Governor of the Bank of Spain in his controversial appearance: that the autonomous communities provide in the future data regarding their budgetary execution on a monthly basis as does the central State; as monitoring what is being done is «very important».

Total funding

The great contraction

Autonomous Communities are not the only ones that are having to tighten their belts. The public accounts do not look good to many of the 8,112 municipalities that Spain has. The difficulties of access to credit are linked to a fiscal problem. As a result of the real estate crisis, they have collected about 15,000 million euros less per year due to operations related to the purchase of homes, either through the VAT or the Property Transfer Tax.

This is very bad news for organizations whose tax margin is very limited. Before 2007, many of the Spanish town halls had based a large supply of services on the idea that the real estate boom was never going to end. That had allowed them to maintain debt levels below 2.8 percent of GDP. In just two years, the entire local debt has come to represent 3.4 percent of the Spanish economy. These are levels too high if we consider that the possibility of doing business with bricks is far-fetched, and that it is increasingly difficult to place debt issued in the capital markets.

A study carried out by the Progress and Democracy Foundation and UPyD (a Spanish political party) estimated at 6,211 million euros the unnecessary municipal expenditure of the 40 main municipalities in Spain. Among them, the Madrid consistory stands out, which concentrates 38 percent of all the municipal cost overrun of the 40 large cities, with 2,388 million a year, six times more than Barcelona, ​​although its population is only twice that of the Catalan capital.

Negotiating funding

In order for them to face this situation of economic adversity, without compromising the viability of companies, unjustly punishing their citizens or provoking a new real estate bubble, it is necessary that the central state penalise this type of behaviour. It must also develop a tax model that avoids dependence on brick to the same extent that it has ceded much of the income from different types of taxes to the autonomous communities. And it has to be a uniform model that favors fiscal discipline.

In addition, the Government has to find a way to guarantee payment to suppliers as the only possibility of maintaining local activity. For the time being, it has offered them a lifeline in the Budgets for 2011 by providing that local entities do not have to start reintegrating the negative settlement of the fiscal year 2009 until January 2012, and by postponing it for a period of five years.

What expense will local entities incur in the PGE 2011?

Despite the cuts implemented by the Government, local entities will receive 14,443 million euros next year for their participation in State Revenues, confirming the 9 percent increase over 2010. This amount is broken down into current transfers that will be received by City Councils, Provincial Councils, etc. as account deliveries (13,235.98 million euros) and transfer of state taxes (more than 1,500 million euros).

Thus, the total amount of local funding would reach 14,760 million euros, to which we must deduct the 303 million that local entities must return next year as the first payment for the negative settlement of the 2008 financial year. According to the text of the General Budgets (PGE in Spanish) for 2011, deliveries on account to the municipalities subject to the general regime will amount to 3,913.26 million euros. In the case of the consistories included in the assignment model, the amount on the budget reaches 5,015.22 million euros. The provinces and similar entities will receive 4,293 millions.

Moreover, and among other measures, the text sent to the Congress of Deputies includes a special fund for small municipalities, endowed with 45 million euros —which implies a reduction of 5 million compared to the 50 million euros received by these municipalities during 2010.

The alternative

The budgets for 2011 confirm the enormous expense for Spain of the current local organisation, which requires greater amounts of money even in austere times. Thus, it is essential to find a solution that drastically cuts local expenses and offers a better service to citizens.

In this sense, the authors of the Progress and Democracy Foundation study propose to reduce the number of municipalities (8,122 today) by 70 percent, since most of them are too small to be efficient. This model change has already been successfully implemented in the past by some of our European partners, such as the United Kingdom, Germany and Belgium.

In Spain, a total of 6,821 villages have fewer than 5,000 inhabitants, which means that there is an extra cost for city halls, councilors, municipal buildings and duplicate administration, among other costs.

The most efficient size for a municipality is 20,000 inhabitants, according to the calculations of this organization. This number guarantees —with few exceptions, such as Bilbao, Seville, Vitoria, Pamplona and San Sebastián— the existence of economies of scale. In councilors alone, a reform of these characteristics would allow to suppress 45,158 town councilors of the 62,158 that there are in the municipalities of less than 20,000 inhabitants if they were merged into 1,000 consistories.

To undertake this reduction, those responsible for the study suggest that the Government propose municipal mergers initially voluntarily to obtain population nuclei of at least 5,000 inhabitants, although giving priority to higher concentrations of 10,000 or 20,000.

Also, this reduction would mean the abolition of provincial councils —since its objective is to assume the services of small towns—, so that the annual potential savings could amount to about 3,900 million euros.

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