The uneasy coexistence of the Spanish foral and common regional finance systems

This paper develops a model which integrates the foral or cupo system applied to the Basque Country and Navarre, the common system applied to the other fifteen Spanish autonomous communities and the central government budget. The model shows that the theoretical cupo it generates is nothing more than an indirect form of measuring the equalising transfer between the central government and the corresponding autonomous jurisdiction. The cupo form per se is completely neutral: the foral jurisdictions operate exactly under the same financial conditions as the non-foral jurisdictions, despite that in the latter case the transfer is directly measured as the difference between expenditure needs and fiscal capacity. In the context of our model, the cause of the foral economic advantage is the particular imputation procedure developed by the cupo law, which clearly biases the scales in favour of the foral and, therefore, against the non-foral communities. An economic advantage of the foral respect to the aggregate of the non-foral communities that, even if only referred to the design of the cupo, we have estimated at 29.8% in the case of the Basque Country and at 28.2% in the case on Navarre. These calculations should be interpreted as a lower bound on the foral advantage. The model has clear implications for reform.