deficit targets

The Catalan Vice President and Minister for Economy and Tax Office, Oriol Junqueras, voted against the new regional deficit target of 0.6% of GDP agreed between the Conservative People’s Party (PP) and the Spanish Socialists (PSOE). During the Council on Fiscal and Financial Policies (CPFF, going by its Catalan initials) on Thursday evening, Junqueras said that the target is “absolutely far from what citizens need and deserve”. The Catalan Government had asked for a 1.18% deficit target for 2017, but the Autonomous Communities’ limits were set instead at 0.6% for next year, 0.3% for 2018 and 0% of GDP for 2019. They were accepted despite the opposition of Catalonia, the Balearic Islands and Valencia. The communities led by the PSOE abstained. The Spanish Finance Minister, Cristóbal Montoro, celebrated the fact that only three territories voted against the measure, saying there was a “good atmosphere” at the meeting.

Despite the fact that all the Autonomous Community governments that are not run by the People's Party (PP) requested the Spanish Executive  – run by the PP – to allow them a greater deficit in 2016 and that Spain's independent fiscal authority Airef also recommended granting regional governments greater deficit targets for next year, the Spanish Finance Minister, Cristóbal Montoro, has rejected doing so. In 2016, the Autonomous Communities will have to close their budgets with less than a 0.3% deficit, "an absurd" and "unrealistic" figure according to the Catalan Finance Minister, Andreu Mas-Colell, who was recently awarded an honorary PhD in Economics by the University of Chicago. The Catalan Government asked for a 0.88% deficit target for 2016. Besides this, next year the Catalan Executive will receive €1.2 billion that should have already been transferred by the Spanish Executive but was not, due to Montoro's tax revenue miscalculations. In addition to this, since economic activity is growing, the Spanish Government will increase the Catalan Executive's funds by €700 million each year from 2016 onwards.

In times of economic crisis, the Mariano Rajoy-led Spanish Government has been making recentralisation a main driver of its political agenda, using the economic recovery as the reason for passing the reforms. An additional step in this direction was taken on Monday with a new regulation forcing Spanish Autonomous Communities to seek permission from the Spanish Ministry of Finance before granting loans and guarantees to private companies located in their territories. From now on, Madrid's permission will be conditional upon the applicant's compliance with deficit targets. The new regulation substantially curbs the Autonomies' powers to shape their industrial policies, following a reform passed in May that modifies both the Organic Law for Financing the Autonomous Communities and the Organic Law on Budgetary Stability and Financial Sustainability.

The International Monetary Fund (IMF) has reviewed and improved its economic growth forecasts for Spain, going from a 2.5% growth rate for 2015 forecast in April to a 3.1% one foreseen this June, and from 2% to 2.5% for 2016. However, the IMF has also issued recommendations and warnings, emphasising that Spain will have to carry out "additional fiscal efforts" and "structural reforms" in order not to jeopardise the country’s economic recovery. The IMF recommends that Spain reduce the costs of public healthcare and education by making users pay for part of the services. According to the international organisation, Autonomous Community governments – such as Catalonia's – should have greater fiscal responsibilities in such systems since they exclusively manage them. In this vein, the IMF has praised the fiscal consolidation efforts undertaken over the past few years by regional governments and has asked for an increase in their funding and fiscal powers, as well as for the adapting of the deficit targets to their needs.

The Catalan Government has sent another warning message about its lack of liquidity, which depends on the Spanish Executive’s regular transfers since most taxes are collected by Madrid-based services. The Catalan Minister for the Presidency, Francesc Homs, accused the Spanish Government of "deliberate asphyxia" and asked the rest of the Catalan parties to "pool together" to denounce the situation. According to Homs, such financial asphyxia will affect everything except salaries. All Catalan Government departments will be affected and their payments to service providers will be delayed. The Catalan Finance Minister, Andreu Mas-Colell, already warned about this financial asphyxia on previous occasions. In the coming days, Mas-Colell will meet with the rest of the parties to discuss the situation. However, the Spanish Finance Ministry rejects the accusation and has stated that it has made all the pending transfers.

The Autonomous Community governments, such as the Catalan Executive, cannot meet the deficit objectives imposed by the Spanish Government because of the current inter-territorial fiscal scheme, according to a report from the Spanish banking giant BBVA. The bank has published two studies on two consecutive days that shed some light on this scheme and its consequences. In the first report, the BBVA states that spending per capita on basic Welfare State services, such as healthcare and education, varies by 60% among the Autonomous Communities. A second report highlights that the Spanish Executive reduced the funds for the Autonomous Community governments in 2014, despite the economic situation and the intake of public revenue improving. On top of this, it refuses to review a fiscal scheme that legally expired 16 months ago and that was designed before the financial crisis.

The Catalan Government registered a 2.58% deficit in 2014, according to the Spanish Finance Minister, Cristóbal Montoro. The Catalan Finance Minister, Andreu Mas-Colell, already unveiled this figure a few days ago, but explained that it was including the public bailout of a highway charged on 31 December 2014, as otherwise the figure would be 2.13%. In any case, Catalonia's deficit is higher than the 1% target unilaterally imposed by the Spanish Government on the Autonomous Communities. The Catalan Government protested months ago, saying that it was not a realistic target, that it was unfair since it was not in line with spending responsibilities in the management of basic public services, and that it was went against the Budget Stability Law. The Catalan Government took it to the Constitutional Court but the verdict has not been issued yet.

The Catalan Finance Minister, Andreu Mas-Colell, has announced a €4.23 billion deficit for 2014, representing a 2.13% deficit, significantly higher than the 1% target imposed by the Spanish Government. Mas-Colell stressed that spending went as planned, but revenue was far from the expected result, obtaining €1.91 billion less than expected, since the Spanish Government reduced the Catalan Executive's funds by €600 million. In addition, it has not shared with the Autonomous Communities all the money from the revenue increase of 2014 which came due to the economic recovery. "We have not seen a single euro of this additional revenue", complained Mas-Colell, who estimated that €900 million of this money should have gone to Catalonia. In addition, he has always argued that a 1% deficit for 2014 was not realistic and that it was "illegal", after filing a complaint to the Supreme Court.

The Constitutional Court has accepted to debate the Spanish Government's last appeal against the Catalan Executive's tax on bank deposits, which has to be paid by financial entities. Such a decision represents the automatic cancellation of the tax for an initial period of 5 months. Catalonia approved such a measure in December 2012 and two weeks later, the Spanish Government approved its own tax with a 0% rate, so it was 'de facto' cancelling the regional taxes. However, instead of compensating Catalonia for having cancelled the tax – as it is legally obliged to do – the Spanish Government refused to do so, since it argued that the tax had not entered into force yet and took the issue to the Constitutional Court. The Court initially accepted the Spanish Executive's appeal and the tax was temporarily suspended, but in May 2013 it was lifted. In July 2014, the Spanish Government modified the tax with a 0.03% rate and in December it presented a new appeal against the Catalan tax, which brought in some €680 million in 2014.

The Catalan Government is expecting to post a 2.2% deficit for the whole of 2014, corresponding to some €4.41 billion. However, the definitive figure will not be known until March. This is more than  double the 1% deficit target that the Spanish Government unilaterally imposed on the Catalan Executive. Over the last few years, the two governments have quarrelled about deficit targets, since the Spanish Executive is imposing much stricter objectives on the Autonomous Communities than those it allows itself, despite regional governments exclusively managing and funding the basic Welfare State services such as healthcare and education. For instance, for 2014, the Spanish Government only allowed the Autonomous Communities to only have 15% of the whole deficit allowed by the European Union to Spain’s entire public sector, despite managing some 35% of the country’s public funds and basic services.

The Catalan Government has formally requested €9.46 billion in loans from the Liquidity Fund for the Autonomous Communities (FLA), run by the Spanish Finance Ministry, to face debt payments and other obligations during 2015. This is the only way that the Spanish Government authorises the Catalan Executive to request liquidity as it has banned Catalonia’s access to financial markets to obtain additional funds, as many governments do when they issue bonds or ask for loans. Therefore, the FLA has become the Catalan Executive’s only bank and a source of funds that must be returned. However, for the first time this year, the Spanish Government will not make money on the FLA and has set a 0% interest rate, which will have a €300 million positive impact on the Catalan Executive’s budget.

The President of the Catalan Government, Artur Mas, assessed on Tuesday the Executive’s work during 2014, which he found to be “positive” overall, although he admitted there are still many people in great need and many social and economic challenges ahead. Referring to the current debate on whether to call early elections transformed into a ‘de facto’ referendum on independence from Spain, Mas promised immediate decisions to be announced on Thursday. Before taking the definitive decision and after weeks of admitted “confusion”, the Catalan President wants to hold a last round of talks with the main civil society organisations supporting independence and the left-wing pro-independence party ERC – with whom the governing centre-right pro-Catalan State coalition CiU has shared a parliamentary stability agreement for the last 2 years. “I will not slack” in the self-determination process, Mas stated.

Public employees of the Catalan Executive will receive their full salary in 2015. For the last 3 years, they have earned some 7% less in order to meet the strict deficit targets unilaterally imposed by the Spanish Government. The Catalan Government has approved a decree on Tuesday setting the full salary’s restitution, but the measure will not be “100% guaranteed until the new budget for 2015 is approved”, stated the Catalan Minister for the Presidency, Francesc Homs. The governing centre-right pro-Catalan State coalition CiU and the opposition left-wing independence party ERC are currently negotiating this new budget, although the ERC has thus far been reluctant to support it. The CiU and the ERC have been negotiating for the last few weeks over whether to call early elections in order to transform them into a ‘de facto’ plebiscite on independence, and whether they should run together or not. The 2015 budget is also part of this debate.