The Catalan Independence debate in numbers

Living with 3 Catalans, a debate about Catalan independence is often sparked. Many pro-arguments and counter-arguments are put forward and whilst I admire the passion in these discussions, what annoys me is a lack of evidence, numerical or otherwise to back up claims. In this article I will try to quantify the best of my ability (I’m no economist!) a few of the bold statements that are passed around my living room weekly.

“Catalunya is being dragged down by the other states' that are incapable of paying their debts”

I can’t prove this statement true or false, but I can point out that (in June 2012) Catalunya have the largest share of Spain’s government debt – representing just over 29%, with the second being Valencia with a share of 14.19%. NB: government debt is 76.77% of the Spain’s global debt.

“Catalunya is getting ripped off paying taxes that are then distributed to other states”

After Madrid, Catalunya do pay the most taxes (in total and in terms of rates per bracket). But are these contributions then unfairly distributed around the country as transfer payments? This question has already been covered in another blog post, which I will explain now briefly:

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The vertical axis represents the income per capita in each autonomous community, whilst the horizontal axis is the gain/loss of income after taxes have been distributed throughout the country for social welfare.
The sloping line presents the relationship between income and distribution, from which the authors derive a reference of “fairness” – as there is no absolute value to place on such a concept, they compare how each state is treated compared to the others. Deviation from the slope is hence a measure of unfairness, with points above the slope indicating receiving more than what is deserved, and the area below indicating receipt of less than deserved.
The arrows show where a state should be, while its initials are its actual position.

So what does the graph tell us?
Firstly, Navarra, País Vasco and Asturias are receiving more than what corresponds to their income per capita according to the slope. For example, to be “fair” Navarra should contribute (lose) 5% of their income, but instead they receive (gain) nearly 1%. The findings for Navarra and País Vasco are explained by the fact that those states have control over distribution of their taxes within their community and only pay a small percentage to the central government. Given that they are also the two richest states of Spain, perhaps only fiscal independence is necessary for Catalans to gain wealth.

Underneath the slope, we see four states – Valencia, las Islas Canarias, Murcia and Andalusia - are receiving less than they should according to the current system (the slope).

The conclusion is that, despite the fact that Catalunya (along with Madrid and the Baleares) is averaging a negative balance compared to the rest of the country, this is indeed what they should receive given a fair tax system. They are net contributors to Spain because they have a higher income per capita, and are in fact being treated “fairly”, unlike poor Murcia! Admittedly however, this finding is unlikely to console a Catalan who doesn’t want to be part of Spain for cultural rather than economic reasons.

“Catalunya is the most productive state hence we’ll be able to pay off our debts better”

Treating the first part of the statement: Whilst Catalunya has the highest GDP of Spain’s states, and the 2nd largest active population, it does not have the highest GDP per capita. Datos Macros have in fact calculated it as 4th place, behind País Vasco, Navarra and Madrid.

For the second part: In terms of the public debt in 2011, the infographic below using data from the Banco de España starkly shows Catalunya’s part of Spanish government debt - a hefty 41.778m euros, which is more than twice as much as the second most indebted community, Valencia.

To paint a fairer picture, let’s rationalize it and make it relative to each autonomous community. When we take each debt as a percentage of each GDP, Catalunya is highest again, with their debt amounting to 22% of their GDP (June 2012, Banco de Espana).

When faced with the argument that Catalunya would struggle as an independent state because they have the highest debt, my flatmate argues “Catalunya only has the highest debt because they have more people and by the same merit they can work it off better than any other state in Spain”. So I did a quick calculation of dividing absolute debt by active population, using numbers for June 2012, (ignoring smaller communities Cueta and Melilla because of incomplete data). The results indicate that the working population of Catalunya would actually face the biggest burden compared to any other state should the repayment be based solely on their contribution:

“If Catalunya gained independence, it wouldn’t be allowed into the EU”

Starting on more basic grounds, declaration of independence does not equal being a legally recognized state. To do that one needs international recognition, from neighbouring countries, or from the United Nations. Some commentators have suggested as a potential barrier that other countries with bonds with Spain will refuse to recognize Catalunya’s independence, whilst others have suggested it will receive little foreign support as it could be seen to 'incite' more communities (such as Scotland or Venice) to follow suit in declaring independence.

Catalunya through its existence in Spain meets the Copenhagen criteria (conditions for membership of the European Union) such as a democratic government, human rights, functioning and competitive market economy, monetary union with the Euro and other aligned goals. However, whether or not it can automatically assume its own membership in the EU or will have to painstakingly reapply is still undecided by officials.

In the upheaval of independence it’s plausible that administration and other costs could spiral out of control and jeopardise Catalunya’s commitment to the EU's Stability and Growth Pact, where fiscal compliance is having debt-to-GDP ratio below 60% (currently at 22% for Catalunya). The ratio could also be made higher by virtue of GDP reducing: analyses by JP Morgan and UBS estimate a GDP loss of 10-15% for Catalunya even if it stays in the EU and receives financing. This is in turn relates to the often spouted argument in our household that “If Catalunya became independent, all the businesses would leave”. Would investors stick around long enough to take that risk, and would foreign direct investment take a plunge? I'll let you make your guesses.

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The aim of this article is not to give my opinion about whether or not Catalunya should or would be better off by becoming independent, but to encourage those people involved in casual debates to take some time to research their arguments.

Watch this space!