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The European Commission recognises Catalonia’s “budget cuts of unprecedented proportions” to reduce the deficit

The European Commission also recognised "a different effort" to the rest of Spain’s Autonomous Communities. Brussels said so when on Tuesday it asked Spain “to strictly control” the public “deficit and debt of regional governments”, the day after Moody’s rating agency warned about Catalonia’s expected deficit for 2011. The Spanish Government took note from this particular recommendation but not the other made by Brussels, which included increasing energy taxes and VAT. The Catalan Government criticised Moody’s for “creating alarm” with assessments that do not take into account the whole situation. In addition, it denounced how the Spanish Government has reduced its own deficit by transferring it to the Autonomous Communities.

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09 June 2011 05:41 PM

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ACN / Albert Segura / Gaspar Pericay Coll

Barcelona / Brussels (ACN).- Spanish Autonomous Community deficits are in the spotlight. The discussion about the deficit of Autonomous Community Governments began in Madrid some months ago, but it has reached international relevance now that Moody\u2019s and the European Commission have focussed their analysis on it. On Thursday, the European Commission\u2019s spokesperson for Economic Affairs, Amadeu Altafaj recognised Catalonia\u2019s \u201Cbudget cuts of unprecedented proportions\u201D to reduce its own public deficit. In addition, he added that Catalonia is making \u201Ca different effort\u201D to the rest of Spain\u2019s Autonomous Communities, as not all the regional governments are making the same efforts to control their public expenditure. Altafaj insisted that \u201Call the Communities need to be equally obliged to fulfil\u201D the austerity requirements. Nevertheless, Brussels \u201Cappreciates\u201D the \u201CCatalan executive presented a 10% budget cut\u201D. These statements nuanced those made earlier this week by the EC itself and by Moody\u2019s. On Monday, the American rating agency Moody\u2019s criticised the Catalan Government\u2019s deficit for 2011; and on Tuesday it was the European Commission that criticised Spain for not controlling the finances of the Autonomous Communities. While presenting the last economic forecast, the President of the European Commission Jose Manuel Durao Barroso and the European Commissioner for Economic and Monetary Affairs Oli Rehn insisted that the Spanish Government must \u201Cstrictly\u201D implement the mechanisms to control \u201Cthe deficit and debt from regional governments\u201D, in order to meet the 6% objective for the whole of Spain. The day before the EC issued its forecast, Moody\u2019s said that the Catalan public deficit could jeopardise Spain\u2019s entire solvency in the international markets. However, this Thursday, Fitch, another rating agency, undermined that risk, despite being \u201Ca hot topic\u201D. Last week the Catalan Government presented its budget for 2011 with a deficit of 2.66%, instead of the 1.3% objective set by the Spanish Government and some regions but not Catalonia. The Catalan Minister for Finance, Professor Andreu Mas-Colell, insisted that if the Spanish Government showed some institutional loyalty and paid what it owes to Catalonia in 2011, the Catalan Government will be able to meet the deficit objective. Mas-Colell said that he has not given up on receiving the money and if Madrid fulfils its legal obligations and pays, the Catalan deficit for 2011 will be reduced and will meet the objectives outlined. Mas-Colell insists that he prefers modifying the deficit for 2011 to reduce it, instead of doing the opposite and losing credibility. He also explained the Catalan Government cannot cut the budget more than 10% in only one year without drastically affecting basic Welfare State services.


The European Commission put the Autonomous Community deficit in the spotlight

On Tuesday, the European Commission warned Spain of the need to control the deficit of the Autonomous Community governments. Brussels did not make any distinction between the different financial situations of the 17 Autonomous Communities. Neither analysed regional government shares regarding Spain\u2019s public debt and deficit. EC President Durao Barroso and European Commissioner for Economic and Monetary Affairs Oli Rehn asked Spain to \u201Cstrictly\u201D implement the mechanisms to control \u201Cthe deficit and the debt from the regional governments\u201D, putting these administrations in charge of providing the main Welfare State services in the spotlight.

Two days later, this Thursday, the European Commission\u2019s Spokesperson for Economic Affairs, Amadeu Altafaj nuanced Tuesday\u2019s statements. Now the European Commission recognises the Catalan Government\u2019s \u201Cbudget cuts of unprecedented proportions\u201D. Altafaj also insisted that Catalonia is making \u201Ca great effort\u201D, \u201Ca different effort\u201D to the rest of Spain\u2019s Autonomous Communities. He stressed that \u201Cof course Brussels takes this [effort] into account\u201D and \u201Cappreciates\u201D the \u201CCatalan executive presented a 10% budget cut\u201D. The President of the Catalan Government, Artur Mas stated that today\u2019s statements by the European Commission are \u201Can endorsement to the austerity policies\u201D implemented by Catalonia.

However, on Tuesday Barroso and Rehn asked to limit by law \u201Cregional government expenditure\u201D linking it to the annual growth of GDP; a measure that would reduce the already limited fiscal autonomy of Spain\u2019s regions regarding for instance their capacity to issue debt. In Catalonia, this trend might be seen as a re-centralisation of the Spanish State, going in the opposite direction to a federal state model and thus directly attacking Catalonia\u2019s self-government. If this reform was passed it would have political consequences in Spain\u2019s fragile territorial balance.

Besides, Barroso and Rehn asked the Spanish Government to raise energy taxes and the TVA, in order to increase revenues, as well as modifying worker\u2019s social contributions.

Salgado answered the European Commission

The Spanish Vice President for Economy Elena Salgado answered the European Commission\u2019s economic forecast qualifying it as a superficial analysis when it came to recommendations regarding her portfolio, but she said she agrees with the analysis regarding the Autonomous Community government deficit. She said that the EC recommendations regarding energy taxes, VAT and social contributions would not be on the agenda \u201Cfor many terms\u201D, picturing a scenario of at least half a decade. However, she fully agreed when it came to the recommendation regarding limiting the Autonomous Community Government\u2019s deficit and expenditure.

Salgado talked this week to the Opposition leader and President of the Spanish People\u2019s Party Mariano Rajoy about the need to limit by law the expenditure of the Autonomous Communities and link it to the GDP growth, despite the Communities\u2019 legally recognised autonomy over their own finances.

Autonomous Communities represent a small share of the deficit and the debt

The Autonomous Community governments provide basic Welfare State services in the territory they rule, such as public healthcare, education (including universities), and social services. The Catalan Government is even in charge of police and prisons. Globally, Autonomous Communities are in charge of about 40% of  Spain\u2019s total public expenditure. Taking Spain\u2019s global deficit objective of 6% for 2011, Autonomous Community governments are only allowed 1.3% of Spain\u2019s GDP. Therefore, the deficit of regional governments represents 21% of the country\u2019s total deficit, while they are responsible for some 40% of public expenditure. Besides, looking at Spain\u2019s public debt, the Autonomous Communities are only directly responsible for some 17% of it, as most of it corresponds to the Spanish Government. However, the Spanish Government has put the Autonomous Communities in the spotlight, and all of them in the same category; an analysis that is now reproduced by some international actors such as Moody\u2019s or the European Commission, although some nuances are started to be introduced.

The Catalan Minister for Finance Andreu Mas-Colell denounced on Tuesday that the Spanish Government, responsible for 50% of the expenditure in the country, has much more room to plan budget cuts. He insisted that budget cuts need to be made by all the administrations, and not only by some Autonomous Governments. All the regional governments need to implement austerity plans, as well as the Spanish Government itself, he said.

Catalonia is already implementing an austerity plan that has reduced public expenditure by 10%

The Catalan Government has already cut public expenditure by 10% in 2011, a \u201Cgreat effort\u201D \u201Cappreciated\u201D by the European Commission, as the EC Spokesperson for Economic Affairs recognised today. Catalonia will not and cannot go further in the budget cuts without drastically affecting basic services, explained Mas-Colell. However, the Spanish Government refuses to pay money that it legally owes to Catalonia in 2011, which would reduce the Catalan deficit, insisted Mas-Colell. If Madrid does not fulfil its legal obligations towards Catalonia, then Catalonia will not meet the deficit objective, he said. He accused the Spanish Government of having a \u201Cmanipulating\u201D speech and transferring its own public deficit to the regional governments by not paying what it owes and by taking measures that increase the expenditure of the autonomous communities.

If the Spanish Government pays all the owed money, Catalonia will meet the 1.3% deficit objective for 2011

Catalonia gives around 9% of its GDP to the rest of Spain in terms of solidarity each year, which represents some 18 billion euros. Currently, 2.85 billion euros separate the Catalan Government to meet the 1.3% deficit objective this 2011. The Spanish Government should pay 1.45 billion euros corresponding to this year Competitiveness Fund, but does not want to pay this now but instead in 2013. The Catalan Government has not counted this money and if the Spanish Government pays this money on time, the Catalan deficit will be closer to the deficit objective, although 1.4 billion euros would still be lacking. This 1.4 billion euros should come from two other items: the money the Spanish Government is legally obliged to deliver to Catalonia in order to compensate for a recognised historical lack of investment (between 0.8 and 1.2 billion euros in 2011, depending on the calculation formula) and transfers of real estate properties owned in Catalonia (between 200 and 600 million euros). Therefore, if all that money is finally transferred, Catalonia could even be below the 1.3% deficit objective. However, the Spanish Government refuses to pay in 2011 and has asked Catalonia for greater expenditure cuts, which would shock Catalan hospitals, universities, primary schools, and prisons. This mechanism is what Mas-Colell denounces as \u201Ctransferring the Spanish Government deficit to the Autonomous Communities\u201D and then blaming them for not meeting the deficit objective.

Almost no public works in Catalonia but a 3.85 billion euro High Speed Train to Extremadura

Meanwhile, the Spanish Government still acts as if Spain was one of the world\u2019s richest countries and insists on building High Speed Train railways to sparsely populated areas, with small economic weight, such as Extremadura. At the end of April it invited tenders for the High Speed Train from Madrid to Extremadura and allocated 3.83 billion euros for it in 2011. The Catalan Minister for Finance stated that this infrastructure was not a priority, especially when Portugal already announced that it will not build its part and thus the train will have to stop at the border. Mas-Colell\u2019s words provoked anger from the President of Extremadura, Spain\u2019s region with the lowest GDP per capita. In Spain\u2019s regional elections held last May 22nd in most of the Autonomous Communities, Extremadura was the only region where the Socialist Party won. The Socialist Party runs the Spanish Government.

The Spanish Government blames Catalonia and the Autonomous Communities

On Wednesday the Spanish Minister for Public Works and Deputy Secretary General of the Spanish Socialist Party, José Blanco criticised Mas-Colell\u2019s late statements. Blanco said the Catalan Government wanted all the Spanish Government\u2019s public works investment to be done only in Catalonia. The Catalan Government already warned three weeks ago that from all public works tenders in Spain issued in 2011, less than 0.5% were in Catalonia. Catalonia represents about 19% of Spain\u2019s GDP and 17% of Spain\u2019s population.

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  • European Commission's President Jose Manuel Barroso with the Catalan President Artur Mas last March (by R. Correa)

  • The European Commission's headquarters: the Berlaymont building in Brussels (by European Commission)

  • European Commission's President Jose Manuel Barroso with the Catalan President Artur Mas last March (by R. Correa)
  • The European Commission's headquarters: the Berlaymont building in Brussels (by European Commission)