Local governments and territorial inequalities

Maite Vilalta 

Professor of Public Finance at the University of Barcelona and member of the Advisory Council of the Catalunya Europa Foundation

Governments have instruments in their hands to reduce individual and territorial inequalities. It all depends on how you use them. Depending on how they spend and how they obtain the income to finance their spending, they will be contributing more or less to avoid inequalities and/or reduce them. The scheme is very simple: if those who contribute relatively more to contribute income to a government, that is, those who pay relatively more taxes, are those who relatively have more, and the government uses these revenues to make spending policies that favor those who relatively have less, a redistribution will be taking place that will contribute to improve the initial situation of income and wealth. In addition to these fiscal policy instruments, governments also have the power, because we have all agreed to do so, to regulate and intervene in markets, in order to put limits on their operation and prevent inequalities from growing and accentuating. It is the eternal debate between the market and the public sector.

In a composite state, such as ours, where powers and taxes are distributed among different levels of government (central, regional and local), another debate arises regarding which of them is the one in the best conditions to carry out this type of government. redistributive policies. The economic literature and comparative experience reveal the difficulties of sub-central governments, especially local governments, who assume the objective of achieving a better redistribution of income and wealth. The main reason is linked to the mobility of citizens. Individuals tend to move to that municipality where they receive better fiscal treatment, that is, where they must pay less taxes and where they receive more public services and of better quality. This contributes to causing concentrations of relatively rich individuals in some territories (in some municipalities) and concentrations of relatively poor individuals in others. Obviously, this does not help to reduce inequalities, but rather the opposite. And this debate takes on even more force, that is, it makes much more sense when it comes to municipalities that belong to a metropolitan area. It is necessary to find out what is more justified for the municipal governments that comprise it to do and what makes more sense for the metropolitan government to do, to avoid unwanted concentrations of citizenship and situations of inequality. The aim is to check whether the optimal dimension to carry out certain policies is that of municipal governments or that of the metropolitan government (which has a greater dimension), taking into account both efficiency and equality aspects.

Precisely all this was discussed in a session of the debate cycle "The transformation of the city" on metropolitan governance, which took place on October 13, organized by the Catalunya Europa Foundation, the Pla Estratègic Metropolità de Barcelona and the Club of Rome. In a round table with mayors of municipalities of the Metropolitan Area of Barcelona (AMB) and of some municipalities that are within the perimeter of the metropolitan region, the need to address both local financing and the competence framework of the municipalities was highlighted and its relationship with the metropolitan government.

It was clear that the municipalities, although they do not have in their hands the most appropriate instruments to make redistributive policies (for example, taxes on income, such as personal income tax, on the income side, or health competencies, education and social services, on the cost side), end up responding to the demands of citizens and, very often, this leads them to have to assume the provision of certain services that may end up having a significant redistributive impact, a fact which has been further accentuated by the pandemic. 

The municipalities do not consider whether or not they have to do certain “things”, taking into account the current regulatory framework: they simply do them. The town hall is often the first door that citizens knock on when they have a need, an emergency. This has meant that, over time, municipalities have assumed the provision of certain services (for example, nurseries, care for the elderly, housing, etc.) and have implemented certain initiatives (for example, in terms of family policies, minimum income, etc.) that are probably having redistributive effects. Therefore, it is on the spending side (on what they spend) that city councils are contributing, in some way, to combat inequalities. The mayors and mayors spoke of equal opportunities as one of the objectives they wanted to achieve, they said.

The question is whether the financing model that the municipalities have, based mainly on the figure of the Real Estate Tax (IBI) and on an unconditional subsidy that they receive from the central Administration, is the most appropriate to finance this type of policy. And it is in this area that it is necessary to find a balance between the exercise of a certain degree of tax autonomy by municipalities and compliance with some principle of inter-municipal equity. Autonomy and equity should be two compatible principles. With the current financing model, municipalities end up having a volume of resources per inhabitant that can be quite different between them. This means that some can provide more and better quality services to their citizens than others, simply because they have greater tax capacity. You have to think about whether this is what we want, or whether it would be better to introduce some mechanism into the model that would level out the resources that will end up in the hands of each other. And this implies, without a doubt, seriously raising the issue of interterritorial equity and the role of supramunicipality.

Regarding interterritorial equity, it would be necessary to think about the need to implement a true equalization fund that would make city councils end up having a similar or equal volume of resources to meet their spending needs, asking their citizens for the same fiscal effort. This is what should be achieved through the unconditional subsidy that municipalities receive, from the central Administration, in the current model, something that does not happen.

Regarding the role of the supramunicipality, it is worth considering the need to rethink the issue of competence. It is not clear enough who does what. Citizens should be able to identify which services they receive from their council and which are provided (or supplied) by supra-municipal entities (county councils, associations, councils, metropolitan area). There are certain policies that, due to their redistributive effect, would be better to be carried out by a supra-municipal entity (for example, the guarantee of a minimum income or housing policies). And, in the case of the AMB, it would be necessary to address, among others, the system for calculating the contributions it receives from the municipalities that comprise it (on the basis of what criteria: the fiscal capacity of the municipality or the benefits that it receives). receives from the services provided by the metropolitan entity?). Doing it one way or another has equity implications.

All these aspects were covered in the debate. They spoke of the heterogeneity of the territory, the need to coordinate the policies carried out by the different municipalities, the convenience of establishing mechanisms for inter-municipal collaboration, the need to redesign and strengthen the relationships between the different government institutions (with the AMB, with the Generalitat, etc.). In short, some problems were discussed which, depending on whether they are resolved, that is, depending on whether they are financed or depending on the scale of the public entity in which they are dealt with, can greatly improve the living conditions of citizens.

Social inequalities, municipal resources and metropolitan funding ”, is a conference organized by the Catalunya Catalunya Foundation, the Barcelona Metropolitan Strategic Plan (PEMB) and the Club of Rome, which is part of the“ Multilevel Metropolis ”debate series of the participatory process Barcelona Demà Compromís Metropolità 2030, launched by the PEMB.You will find more information about the session here.