Valencia’s public finances finished 2021 carrying the largest structural deficit in the country, widening far beyond the national average and placing the Valencian Community five times higher than the overall rate. This summary comes from a report released by the Foundation for Applied Economics Studies (Fedea). The document breaks down the 2020 and 2021 budget balances of Spanish autonomous communities into cyclical and structural components and recalculates indebtedness levels without covid relief, state transfers, or ad hoc liquidations. Other operations are not repeated.
Fedea stresses that this indicator should not be mistaken for underfunding, though it notes that more funds can correlate with smaller deficits or even surpluses. The structural balance is defined as a balance that reflects discretionary spending and revenue decisions by governments, and the report outlines how this balance is shaped today. European and Spanish tax rules revolve around a main variable that is currently on hold but is expected to move in the future.
The agency points out that the Autonomous Community records show the best financial results in the entire historic series, yet these figures can present a distorted view of the true health of the public accounts, altered by covid-19 and the economic cycle.
Thanks to these injections, the average structural balance across regions improves notably within a year, dropping from negative 1 percent of GDP in 2020 to negative 0.4 percent in 2021. Yet, despite pandemic support, the Valencian Community remains at minus 2 percent of GDP for a second consecutive year, widening the gap with other regions. In essence, the report notes that Consel used the extra resources to boost spending and shrink the deficit, according to Fedea. Consequently, it is stated that Valencia is the only autonomy, along with La Rioja and the Balearic Islands, that did not improve its structural balance compared with 2020.
On the top of the list are the Canary Islands at 1.3 percent, Navarre at 0.8 percent, the Balearic Islands at 0.6 percent, and the Basque Country at 0.5 percent. Asturias and Cantabria are cited at 0.3 percent, while Madrid sits at 0.1 percent. The overall structural balance of autonomous communities was minus 1.0 percent of GDP in 2020 and minus 0.4 percent in 2021.
The report also computes the independent balance of the economic cycle after removing non-recurring operations. It starts from the regional budget balance, which stood at minus 0.2 percent of GDP in 2020 and minus 0.3 percent in 2021 and marks the best financial results in the whole historical series.
However, Fedea notes that these two years were heavily affected by non-repeat operations linked to the Covid-19 pandemic. These extraordinary transfers from the State to mitigate pandemic effects created a false impression of sound public finances.
financial consolidation
The organization warned that despite favorable data at the end of 2021, communities were not fully clearing their financial accounts and urged action after the recession caused by the Covid-19 crisis and the Ukraine war. The report suggests that fiscal consolidation measures should be considered to reduce the current structural deficit.
It noted that changes in the structural balance depend on whether liquidations are assessed at a given point in time, indicating that autonomous communities were using resources from earlier cyclical moments to fund permanent expenses in the current year.
As the pandemic recovery continues and the new pressures from the war in Ukraine subside, the report concludes that communities should pursue fiscal consolidation steps to lower the existing structural deficit in their accounts.