fiscal deficit

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.

According to a study by the Professional Association of Economists of Catalonia (Col·legi d’Economistes), an independent Catalonia would obtain a much better grade from rating agencies than it currently gets, taking into account its diversified economy and higher GDP per capita than the European average. Specifically, it would obtain an A+ rating, 7 levels higher than the current BB ‘junk bond’, using Standard&Poor’s classification. The study highlights that without the current fiscal deficit with the rest of Spain, the rating would be “at least” that of the Basque Country and would enable the Catalan Government to access the international financial markets. Catalan taxpayers pay much more to the Spanish Government than the amount they get back in terms of services and infrastructure; a fiscal deficit equivalent to between €13bn and €17.5bn per year.

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.

Following the agreement reached last week between the President of the Catalan Government and leader of the governing centre-right pro-Catalan State coalition CiU, Artur Mas, and the President of the left-wing pro-independence party ERC, Oriol Junqueras, on calling early elections in September as a plebiscite on Catalonia’s independence from Spain, the Catalan Executive’s budget for 2015 is now closer to definitive approval. On Monday, the ERC MPs started to withdraw their full amendments to the different sections of the Catalan Government’s budget. Now, the ERC is asking the CiU and the Government to debate their specific amendments on precise programmes in order to have “a fairer budget” which is less regional and more that of a country in its “national transition”, they said.

The Spanish Finance Minister, Cristóbal Montoro, has confirmed a new fiscal measure to increase the Autonomous Communities’ revenue, benefiting the Catalan Government as well. After the Council on Fiscal and Financial Policies (CPFF) held on Tuesday evening, Montoro confirmed that interest rates will be set at 0% for the loans given to the regional governments since 2012 through the Liquidity Fund (FLA). The measure will also be in place for 2015. However, the Autonomous Communities that have already met the deficit targets will also be granted a 0% rate for 2016 and 2017. The Catalan Government welcomes the measure but is sceptical about its details. The Catalan Finance Minister, Andreu Mas-Colell, demanded an entirely new funding scheme, since the current one expired a year ago. Montoro is not renewing the inter-territorial funding scheme and instead is using this loan system, which obliges regional governments to return the transferred funds.

Miquel Iceta, First Secretary of the Catalan Socialist Party (PSC), proposed his road map for the coming two years: no early elections and broad Constitutional Reform to better fit Catalonia into a federal Spain. On Wednesday Iceta held his own conference after those of the Catalan President and leader of the centre-right pro-Catalan State coalition (CiU), Artur Mas, and the left-wing independence party (ERC), Oriol Junqueras. While the two others support independence, Iceta opposes it. He totally rejected the road maps proposed by Mas and Junqueras and insisted on the need to work "on the real problems of Catalans", such as poverty, unemployment, budget cuts in public healthcare, etc. However, the PSC leader admitted that "there will be no solution without a vote", but "a real vote". Iceta said that before breaking up with Spain, Catalans should be allowed to vote on "a new agreement" to remain in Spain. In order to facilitate such a new agreement, he proposed that the Spanish Government cancel part of the Autonomous Communities' debt.

The Catalan Government presented on Tuesday its budget proposal for 2015, which has a €22.48 billion spending but only a €19.98 billion revenue. The Catalan Finance Minister, Andreu Mas-Colell, insisted that spending cannot be further reduced since no further budget cuts can be implemented without seriously damaging public services. In fact, the current budget keeps social spending levels of 2014, which represent 71.2% of the new budget. In addition, public employees' full salary will be restored, after it had been lowered for the last 3 years. The 2015 budget posts a 0.7% deficit (€1.44 billion). However, there is a €2.5 billion difference between spending and revenue that should mostly be covered with €2.19 billion from Spanish Government's pending debts. However, Mas-Colell does not rule out being granted a higher deficit target, since the current one is "unfair" and is not in line with the Catalan Government's austerity measures already adopted. Furthermore, the Spanish Government has reduced funds from the regular funding scheme by 10.7% between 2013 and 2015, a €2 billion reduction, despite the economy is recovering. 

The President of the Catalan Government, Artur Mas, confirmed that Spain and Catalonia are already now in a situation of “open conflict”, after the criminal prosecution launched against him and two other members of his Cabinet. However, Mas asked the Spanish Government to end its “angry” attitude and start negotiating, proposing ways out of the current situation. The Catalan President added that the international community will ask the Spanish Government to sit and talk if the current open conflict finally generates “concerns” at an international level. Mas was addressing an economic forum with the main representatives of Catalonia’s business community. The Spanish Minister for the Economy, Luís de Guindos, was also present and they were in friendly conversation for a little while. De Guindos emphasized that the Spanish Government has issued “bailouts for Catalonia in difficult moments”.

The European Commission has warned Spain about its budget for 2015 and the possibility of meeting the global deficit target of 4.2%. It has asked the Spanish Government to adopt the necessary measures to guarantee that the 2015 budget will respect the Stability and Growth Pact. The Spanish Minister for the Economy answered back and affirmed that no additional measures will be adopted since the planned budget and the forecast economic growth “are enough”. The Commission also demanded that the Spanish Government put “more pressure” on the Autonomous Communities that will not meet their deficit target for 2014, which is likely the case of Catalonia. Brussels directly asked for the implementation of “corrective measures” in these cases. However, the Commission did not make any comment on whether such deficit targets unilaterally imposed by Madrid are fair or realistic. In fact, the Catalan Finance Minister accused the Spanish Government of putting the blame on the Autonomous Communities and “discrediting” them, in order to recentralise powers. 

The President of the Catalan Government, Artur Mas, proposed the next steps in Catalonia’s self-determination process: early elections to the Catalan Parliament and, if a single pro-independence list get an absolute majority, negotiations to reach full independence in 18 months. Such a list should be formed by independent personalities and recognised professionals, who should commit to only run once, with traditional parties adopting a secondary role. After negotiating independence and building the new state’s basic structures, a referendum to ratify the new state’s genesis and constituent elections would be called, in which traditional parties would again be running separately. Mas said he was ready to be the front-runner or to end such a list, the latter case ruling out the possibility of his being re-elected. However, he will only call early elections if parties and civil society organisations transform them into such a ‘de facto’ referendum on independence. After years of peaceful citizen mobilisations, now “it is time for the definitive vote” and the “only” way of doing it is through early elections, he said.

On Wednesday, the Spanish Finance Minister, Cirstobal Montoro, refused to start negotiating and launching a new funding scheme for the Autonomous Communities before 2016, even though the current model had to be reviewed before January 2014. The Catalan Government has been insisting on its review since 2012, since the system does not properly fund basic public services such as healthcare and education in times of economic crisis, areas which are entirely managed by the Autonomous Communities. In addition, Catalonia suffers a permanently high fiscal deficit: each year Catalan taxpayers have to give away some 8.5% of Catalonia’s annual GDP to fund services and infrastructure in poorer regions in Spain. The problem is that after such transfers, public services in the poorer parts of Spain have more money per inhabitant than the Catalan ones and basic infrastructure in Catalonia is not built. The Spanish Government has been postponing the new model, despite the territorial tensions and the self-determination demands.

On Sunday the Spanish Socialist Party (PSOE) approved another solemn declaration proposing a Constitutional Reform, after it already did so in July 2013. Once again the PSOE has not detailed their proposal, but insists on building a true federal model, going beyond the current Autonomous Community system. The People's Party (PP) – which runs the Spanish Government – opposes such a reform although they "agree to talk" about it. The PSOE wants the PP to "immediately" approve the creation of a Constitutional Reform committee at the Spanish Parliament and set expert hearings to debate ideas. However, they do not want "to rush" to solve Catalonia's "urgent problem", as explained by the President of Andalusia and PSOE's Chairperson, Susana Díaz. Meanwhile, the alternative left party Podemos, which could win the next Spanish elections, has elected Pablo Iglesias as its Secretary General, who has promised a broad Constitutional Reform. Iglesias recognises Catalonia's right to self-determination but considers that the Catalan Government cannot approve a unilateral declaration of independence.