Catalonia contributed with 8.5% of its GDP to infrastructures and services in the rest of Spain in 2010

Barcelona (ACN).- In 2010 the Spanish Government took €16.54 billion away from the taxes and fees paid in Catalonia and redistributed the money to the rest of Spain and abroad, while the Catalan Government was significantly under-budgeted and had a €8.3 billion deficit. On Tuesday, the Catalan Government posted the so-called fiscal balances for 2010, which show the difference between the money paid in Catalonia in taxes and fees to the Spanish Government and what comes back in the form of funds, services and infrastructure. Using the monetary-flow formula, which takes into account investments and transfers made directly in the Catalan territory, in 2010 Catalonia had a fiscal deficit representing 8.5% of its GDP. This means that Catalonia had a €16.54 billion deficit in a single year, which is more than half the budget of the Catalan Government. Using the benefit formula, which also takes into account investments made in other parts of Spain that theoretically also benefit Catalan citizens – such as the army, Madrid’s Prado Museum, the civil-servants based in the Spanish Capital and the high-speed railway between Seville and Ciudad Real – Catalonia had a fiscal deficit of 5.8% of its GDP, representing €11.26 billion. The Catalan Finance Minister, Andreu Mas-Colell – who is a former Harvard and Berkeley Economics Professor – stated that both formulas “are complementary” since they measure different things, but he finds the monetary flow formula to be “closer to the reality” it evaluates since “it is difficult to quantify in which way an investment made in Madrid’s Prado Museum benefits Catalonia”, as “an investment in the Louvre Museum” could also theoretically have an indirect effect. In addition he stated that the monetary flow formula, which is much more direct and simpler to calculate, is particularly relevant “in times of economic crisis and high unemployment”, since it takes into account all the pensions and unemployment benefits. Mas-Colell emphasised that the difference between the money Catalan tax payers bring in to the Spanish Treasury and what they receive back “is a negative shock”.

For the last 25 years, Catalonia has been giving away 8.1% of its GDP

The figures are similar to the results from previous years as well as to the study published in 2008 by the Spanish Finance Ministry with data from 2005, which is the only time during democracy the Spanish Government has published such a report despite several petitions from the Parliament. Mas-Colell also reviewed the historical series, showing that the Spanish Government has been obliging Catalonia to give away an average of 8.1% of its annual GDP each year between 1986 and 2010 (the period accurate data is available for) using the monetary flow formula. The year Catalonia contributed less was 2001 and it gave away 6.7% of its GDP. The year contributed the most was next year (2002) and it gave away 10.1% of its GDP. Mas-Colell also emphasised that in the years of the economic crisis, Catalonia has been contributing beyond the 8.1% average (8.6% in 2008, 8.5% in 2009 and 8.5% in 2010).

With a fairer fiscal redistribution, the Catalan Government would not have a budget deficit

In addition, he also explained that if Social Security was not taken into account, Catalonia would have contributed 19.5% of the Spanish Government’s revenue in 2010 and would have only received 11.3% of the spending. With a fairer fiscal balance, Mas-Colell stated that “we would not have to undertake budget cuts”, since the Catalan Government would not have a budget deficit.

Catalans paid €61.87 billion and received €45.33 billion

While Catalans contributed to the Spanish Government with €61.87 billion in taxes and fees, they only got back €45.33 billion, a difference of €16.54 billion (€16,543 million). This means that Catalonia brought in 19.4% of the Spanish Government’s revenue, despite the fact that it represents only 18.6% of Spain’s GDP and 16% of the population. Mas-Colell stated that this difference is “somewhat to be expected” since Catalonia is wealthier than the Spanish average. However, the Catalan Finance Minister stated that “what is rather surprising” is the fact that Catalonia only receives 14.2% of the Spanish Government’s direct spending, using the monetary flow formula.

Using the cost-benefit formula – which measures the impact on citizen welfare in a given territory and requires more assumptions to be made – Catalan taxpayers brought in 18.9% of the Spanish Government’s income, representing €60.58 billion. Catalan citizens received 15.4% of the Spanish Executive’s spending, amounting to €49.32 billion. This made the fiscal deficit €11.26 billion, 5.8% of Catalonia’s GDP, using the cost-benefit formula.

Without taking Social Security into account, the Spanish Government spent 11.3% in Catalonia

The Catalan Finance Minister also wanted to consider the sub-balances, in particular that referring to Social Security, which is directly managed by the Spanish Government. Mas-Colell explained that the Social Security payments come from personal rights, since people contribute and they directly receive money from it in the form of pensions or unemployment benefits. Therefore, payments made by the Social Security should not be politically biased. Without taking Social Security into account, Catalans contributed 19.5% of the Spanish Government’s revenue. Instead, they received 11.3% back, which significantly increases Catalonia’s fiscal deficit. According to Mas-Colell, this shows the “political will” behind the allocation of funds made by the Spanish Government. Furthermore, looking at the historical series, without taking into account Social Security, Catalonia contributed 19.7% of the Spanish Government revenue between 1986 and 2010. In these 25 years, it received an average of 11.2% of the spending. This lack of investment, carried on for decades, undermines Catalonia’s economy and public services.

An independent Catalonia should have at least €11.26 billion more, according to Mas-Colell

Asked about the costs of an independent Catalonia and if the fiscal deficit would cover the difference, Mas-Colell stated that this required a more detailed calculation. However, he stated that the benefit formula already takes into account the cost of the civil servants, embassies, the army, etc. Therefore, according to him, the difference between both formulas “is a quite good and fast approximation to the costs” of the additional costs of an independent Catalan state. This means that the government of an independent Catalan state would have at least additional €11.26 billion with the current tax levels and public services offered (using the hypothesis that they were maintained).

A different debate to the deficit targets, according to Mas-Colell

The Catalan Government’s study comes in the middle of the debate regarding deficit targets for 2013, although it is published each year. However, Mas-Colell wanted to “unlink” the two issues, since the fiscal balances and the fiscal deficit are a debate for the “mid- and long-term”, affecting the relationship between Catalonia and Spain. He also emphasised that they are published each year.

The Catalan Government’s finances are under stress

Over the last few weeks, the Catalan Government has been holding hard negotiations with Prime Minister Mariano Rajoy to be allowed a €2.1% deficit, representing €4.1 billion. The Spanish Government raises the majority of taxes and partially funds the Autonomous Communities, which have quite limited fiscal capacities. In addition, it imposes extremely strict deficit targets and it does not honour the regular funding of the Catalan Government, foreseen by the current legislation. In fact, the Spanish Executive owes Catalonia more than €2 billion in unpaid debts. In addition, instead of honouring those debts, it offers loans to the Catalan Government through the Liquidity Fund for the Autonomous Communities (FLA) – which will have to be paid back later with high interest – and it presents them as financial assistance. This generates additional costs for the Catalan Government, as do the other Spanish Government’s decisions such as raising VAT.

All these decisions put the Catalan Government’s finances under severe stress and oblige them to undertake drastic budget cuts in order to keep the budget deficit under control. In the last two years, the Catalan Government has significantly reduced its budget and has implemented many austerity measures reducing the deficit by €4 billion, with consequences for the services offered to Catalonia’s population. The Catalan Government ended 2012 with a 1.96% deficit, representing some €4 billion, but it did not meet the 1.5% target imposed by the Spanish Government despite many budget cuts. Barcelona had previously warned that a 1.5% deficit target for 2012 was not realistic.

Regional leaders from largely-subsidised Autonomous Communities criticise Catalonia

Now, in the context of the economic recession, with drastic revenue reductions, the Catalan Government refuses to undertake a €3.5 billion adjustment in a single year in order to meet the 1.2% deficit objective set for the Autonomous Communities by the Spanish Government. Therefore, since the Autonomous Communities represent 36% of Spain’s total public spending and Spain is forecasting a 6.3% deficit in 2013 for its entire public sector (although some international organisations foresee at least a 6.5% deficit), the Catalan Government is asking for a third of the amount, which would be a deficit target of 2.1%. However, regional leaders from Rajoy’s People’s Party (PP) from largely-subsidised Autonomous Communities – such as Extremadura, Castilla-la-Mancha and Galicia – are accusing Catalonia of not making enough fiscal consolidation efforts and being subsidised by the Spanish Government’s money. In addition, they state that Catalonia would be “privileged” by Rajoy if such a deficit is allowed.

The wide majority of Catalans demand a fairer fiscal agreement, with the Catalan Government collecting all the taxes

Taking the historical series into account, which state that Catalonia has been obliged to give 8.1% of its annual GDP to the rest of Spain and abroad each year between 1986 and 2010, many Catalan citizens demand that this money transfer be reduced since Catalonia’s public services are under-budgeted. This undermines the Catalan economy and society, having negative consequences for Catalan companies and citizens, especially the less favoured ones. In addition, many think that in the context of economic crisis Catalan citizens cannot transfer between €11.26 billion and €16.53 billion to the rest of Spain, while severe budget cuts are being undertaken in Catalonia. Therefore, they would like this imposed solidarity to be reduced.

In this context, a large part of the Catalan society – which represents around 77% according to the latest polls – are backing a specific fiscal agreement for Catalonia, by which the Catalan Government would collect all the taxes and would pay Madrid later for the services delivered and investments made, as well as an amount for territorial solidarity with poorer Spanish and European regions as well as for international cooperation. A similar agreement is in place for the Basque Country and Navarra, which contribute much less than Catalonia to the Spanish Treasury. However, setting a specific economic agreement for Catalonia was refused in September by Prime Minister Rajoy. This refusal and the lack of recognition of Catalan taxpayers’ solidarity with the rest of Spain are feeding support for independence in Catalonia. In fact, Mas-Colell stated that the demand for a specific economic agreement is now over.