Spanish Government may eliminate interest rates on loans funding Autonomous Communities

Barcelona (ACN).- The Spanish Finance Minister, Cristóbal Montoro, announced on Wednesday new measures “to reduce the interest rates” paid by the Autonomous Community governments, including that of Catalonia. A few hours before the official announcement was made, sources of the Spanish Finance Ministry told the CNA that the interest rates of the loans given to the regional governments through the Liquidity Fund (FLA) and the fund to pay providers would be lowered to 0% in the next few weeks. Instead of modifying the pre-crisis-designed inter-territorial funding scheme, which legally expired almost 12 months ago, or authorising the Autonomous Communities to turn towards international financial markets, the Spanish Government has been issuing loans with high interest rates to fund the regional executives since 2012. As well as this, the Spanish Executive became the only authorised source of liquidity for the Catalan Government to complement the regular largely under-budgeted and expired funding scheme in a period of deep economic crisis and public deficit. So far, the interest rates attached to these loans have been higher than those of the market, which means that the Spanish Government has been making money out of it. 

Cristóbal Montoro confirmed on Wednesday that interest rates paid by the Autonomous Community governments to the Spanish Executive for loans given since 2012 will be lowered but he did not confirm whether they would be totally eliminated or not. However, the measure will also be effective for local governments, he said. Montoro will call the Fiscal and Financial Policy Council (CPFF) to meet next week, on 26 December. The CPFF is the Spanish Government’s body which monitors and rules on the funding of the Autonomous Communities, and is also the forum where regional Finance Ministers meet with the Spanish Finance Minister. However, with Montoro in charge and the People’s Party (PP) holding an absolute majority, the CPFF is also the body that imposes strict deficit targets on the Autonomous Community governments and obliges them to carry the burden for most of Spain’s entire budget adjustment in order to recentralise powers, as has been highlighted by the Catalan Government on many occasions. 

The Catalan Government is sceptical

The Catalan Finance Minister, Andreu Mas-Colell, was sceptical about the announcement as “on other occasions, they fixed you with one thing and damaged you with something else”. “The final amount is what counts”, stated Mas-Colell, who urged the Spanish Government to substitute the expired inter-territorial funding scheme with a new one. The move comes shortly after the opening of the debate in the Catalan Parliament this Wednesday over next year's budget for the Catalan Government.

The Spanish Government issues loans instead of substituting the expired funding scheme

During the morning, sources from the Spanish Finance Ministry told the CNA that on Tuesday evening, Montoro met with the Spanish Prime Minister, Mariano Rajoy, the Deputy PM, Soraya Sáenz de Santamaría, and the Minister for the Economy, Luís de Guindos. They agreed to lower to 0% the interest rates on the loans from the FLA and the Service Provider Fund paid by the Autonomous Community government. Later on in the day, Montoro had still not confirmed such a specific figure though.

The measure should be approved on 26 December and enter into force in 2015. It will be in place until a new funding scheme for the Autonomous Communities is approved, despite the current one having legally expired on 1 January, 2014. A month ago, Montoro ruled out the possibility of approving a new funding system in the coming months and said that a new one will start to be negotiated in early 2016. In this way, the Spanish Government will be condemning the Autonomous Communities to continue to increase their amount of debt in the coming months, instead of honouring the current legislation and approving a new funding scheme adapted to the effects of the economic crisis.

The Spanish Government is recentralising powers and increasing Catalonia’s debt

With a new funding scheme, the Autonomous Communities should receive a greater share of public revenue, more in line with their spending responsibilities managing basic public services. However, with the Spanish Government’s system, instead of being funded in their own right at zero cost, the Autonomous Communities are obliged to ask for loans, which later they will be obliged to return with associated interests (which might be cancelled in 2015, as announced today). So far, the Catalan Government has received €32 billion from the FLA and the Service Provider Fund since 2012, equivalent of some €10.5 billion per year as average. This mechanism has resulted in significantly increasing Catalonia’s public debt. By not modifying the funding scheme, the Spanish Government obliges Catalonia to ask for loans and increase its debt, while powers are being recentralised. 

The current inter-territorial fiscal scheme was conceived just before the economic crisis and was supposed to be renegotiated during 2013, in order to have a new one by 1 January 2014. However, back then, Montoro said there would not be a great enough consensus because of a lack of public resources due to the economic crisis and ruled out the possibility of changing the model, despite it would expire. However, it was precisely the effects of the economic crisis which were making the current system unsustainable as it was under-budgeting the regional governments, which are exclusively managing and funding the main Welfare State policies, such as healthcare, education and social affairs. As well as this, the Catalan Government exclusively manages prisons, policing (with the exception of border control, anti-terrorism and international crime), judicial offices, agricultural policies, employment promotion and cultural policies, among others.

Catalan taxpayers are obliged to give away 8.1% of Catalonia’s GDP each year

In addition, the Catalan Government is significantly under-budgeted in comparison with other Autonomous Communities in Spain, since 43% of taxes paid by Catalan citizens are spent outside Catalonia following the Spanish Government’s non-transparent fiscal redistribution scheme. The Spanish Government raises the majority of taxes and partially funds the Autonomous Communities, which have quite limited fiscal capacities. In fact, according to the most comprehensive study on the issue, compiled by the Catalan Government, Catalans have been giving away an average of 8.1% of Catalonia’s GDP each year for at least the last 26 years, an amount that is equivalent to giving away on an annual basis some €16.5 billion (in today’s money). The Catalan Government’s entire spending for 2015 will amount to some €22.5 billion and 71% of it will go towards paying for the public healthcare system, schooling and university education, and social protection. This excess of imposed solidarity with poorer regions makes Catalonia have less public money per inhabitant than poorer regions throughout Spain, resulting in worse public services and long delays in building basic infrastructure. In particular, this excessive fiscal deficit affects Catalonia’s working and middle classes, those in need, and the entire economy, damaging competitiveness as it does.

The only study by the Spanish Government, published in 2008 with data from 2005 only, showed that Catalonia transferred between 6.4% and 8.7% of its GDP (depending on the calculation formula) to the rest of Spain each year. This means a transfer of between €13 billion and €17.5 billion in a single year. Around 75% of Catalan society wants to change this situation and reduce these fiscal transfers, while keeping certain degrees of inter-territorial solidarity with poorer regions. In fact, the Catalan Government proposed a new Fiscal Agreement between Catalonia and the Spanish Executive in mid 2012, which would halve the Catalan taxpayers’ contributions, ensuring the correct funding of public services in Catalonia and funds for poorer regions. The Spanish Government rejected even talking about this and firmly closed the door on any possible negotiations. 

Catalonia has reduced 15% of Spain’s total deficit, despite only managing 5.5% of total public money

Furthermore, a few weeks ago, Mas-Colell emphasised the fact that the Catalan Government has undertaken the most important budget adjustment in Spain since 2010, Catalonia had a €9.1 billion deficit in 2010 representing 4.53% of its GDP and in 2015 it will post a €1.44 billion deficit, representing a 0.7% deficit. This represents a deficit reduction of 84.2%, equivalent to €7.66 billion. Moreover, if the payment of financial interests were to be left out of the equation, Catalonia would actually post a €273 million budget surplus for 2015, representing a 0.13% surplus in relation to its GDP. In 2010, such a deficit without financial interests reached €8.18 billion, the equivalent of 4.08% of Catalonia’s GDP. Therefore, in 5 years, the Catalan Government will have reduced structural deficit by 103%, transforming it into a €273 million budget surplus.

In addition, the Catalan Government has been directly responsible for 15.12% of Spain's total deficit reduction since 2010, despite it only managing 5.49% of the country's public money. The Spanish Government reduced its spending per capita by €113 between 2010 and 2013, while the Catalan Executive reduced it by €694 in the same period. In fact, the Catalan Government’s spending decreased by €5.24 billion in that period while that of the entire Spanish Government only decreased by €5.28 billion. The Spanish Government is responsible for more than 50% of Spain’s total public spending, despite it not implementing the basic Welfare State policies, with the exception of pensions and unemployment benefits.