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The Autonomous Regions Finance Law (LFRA), Organic Law No. 2/2013, of 2 September, in its current version, establishes, in accordance with the provisions of article 48, the distribution formula of the transfers from the Central Administration to the two Portuguese autonomous regions. This distribution complies with the principle of solidarity enshrined in the Constitution, in the political-administrative statutes and annually in the State Budget (SB) law. The distribution key of the annual transfer overall amount, known as the solidarity transfer, is based on structural characteristics that the legislator took into account: population, geographical and tax burden factors.
The population factor has an overall weighting of 82.5%, which results from the sum of the weightings of three indicators related to the population in the year t-2:
- total existing population, with a weighting of 72.5%;
- population of the Autonomous Region aged 65 years or over, with a weighting of 5%; and,
- population of the Autonomous Region aged 14 years or less, with a weighting of 5%.
The geographical factor, has a weighting of 12.5%, includes the outermost region index, the calculation of which depends on the weighted sum of two indicators:
- the shortest distance between an inhabited point in the autonomous region and the nearest district capital on the Portuguese mainland, with a weighting of 70%; and,
- the number of islands with a resident population in each autonomous region, with a weighting of 30%.
Lastly, the factor relating to fiscal effort, has a weighting of 5%, which results from the ratio between the tax revenues of the autonomous region and the current prices Gross Domestic Product in year t-4.
The calculation of the value of each factor is obtained by the product of the weighting factor and the relative weight of each region in the sum of the two autonomous regions. The sum of the result of the factors for each region determines the percentage of allocation to be applied to the amount of the annual transfer. The following table systematizes these calculations.
Algorithm for calculating transfers under Article 48 of the LFRA
Note: "R" Region; "RA" Autonomous Regions as a whole.
In addition to the solidarity transfer, there is the State Budget allocation for the Cohesion Fund (Article 49). This fund is intended to finance investment programmes and projects included in the annual investment plans of the autonomous regions and aims to ensure economic convergence with the rest of the country. Its value corresponds to a percentage that varies between 0 and 55 per cent of the amount of the solidarity transfer allocated to each autonomous region. This percentage is a function of the ratio of the region's GDP per capita to the national GDP per capita. This transfer does not take place when the region's GDP per capita is equal to or greater than the national GDP. The maximum value of 55 per cent is reached when the regional GDP per capita is less than 90 per cent of the national GDP per capita. The law also determines intermediate levels of 40 per cent and 25 per cent: in the former, when the ratio of regional GDP per capita to national GDP is equal to or greater than 90 per cent but less than 95 per cent, in the latter, when that ratio is greater than or equal to 95 per cent but less than 100 per cent.
As an example, in the period from 2014 to 2022, the overall value of transfers from the State to the Autonomous Regions resulting from the application of the current LFRA totalled €4475 million: €3242 million under the solidarity component (Article 48), and the remaining €1233 million under the cohesion fund. By region, the Autonomous Region of the Azores received a total of €2426 million, while in the Autonomous Region of Madeira these transfers amounted to €2049 million. This difference of €377 million in the volume of transfers between the two regions is explained by €314 million (i.e. 83%) by the State Budget for the Cohesion Fund. The criteria for allocating the funds for this tranche determine this difference. Unlike the previous Autonomous Regions Finance Law (Organic Law No. 1/2010, of 2 September), in which the calculation of Cohesion Fund funds resulted from a fixed percentage of 35% for each Autonomous Region, in the current Law it is now a variable percentage, as described above. In fact, between 2014 and 2022, in six of the nine years of application of the current LFRA, the Autonomous Region of the Azores presented a ratio of GDP per capita in relation to national GDP per capita lower than that observed by the Autonomous Region of Madeira for this indicator. Thus, if, under the Law in force, the calculation of the amounts relating to the Cohesion Fund to be allocated to each region were to result from the previous fixed percentage of 35%, the difference between the Region that receives more to the Regions that receives less would be only €22 million, blurring the disparity in the total transfers received by each region.
Distribution of transfers to the autonomous regions under Articles 48 and 49 of the LFRA (in M€)
Source: Accounts of the Autonomous Regions 2014-2022. CFP calculations. | Notes: * Cohesion Fund amount resulting from the application of the fixed percentage of 35%, as provided for in the previous LFRA.
**This Explainer was firstly published in the Report 01-2024 "Autonomous Regions Budget Outturn in 2022", drawn up and published by the CFP in January 2024.
Date of last update: 06/03/2024