Catalonia sets its own deficit limit at 0.14% of GDP from 2018

Barcelona (ACN).- Catalonia has fixed its own deficit limit at 0.14% of its GDP in 2018 and the years to follow. The Catalan Government approved the Law of Budget Stability on Tuesday, which schedules a gradual and significant adjustment of its budget deficit in order to reach, in 2018, a maximum deficit of 0.14% of Catalan GDP. With the current budget, a deficit of 0.14% of the GDP would represent 280 million euros, explained the Catalan Minister of Finance, Andreu Mas-Colell. Mas-Colell announced the measure will be approved by the Catalan Parliament before the end of the year. He  stressed that Catalonia was imposing a deficit limit on itself. With this law, the Catalan Government will be obliged to respect a deficit ceiling each year, which will be gradually reduced year after year. In 2011, the limit will be 2.66% of GDP; in 2012, the ceiling will represent 1.3%; in 2013, 1.1%; and in 2014, 1%. From this year onwards, the Government will have four more years to reach the 0.14% limitation in 2018, explained Mas-Colell. From 2018 onwards, 0.14% will be the Catalan Government’s deficit ceiling. This way, Catalonia will comply earlier with the deficit limitations foreseen by the reform of the Spanish Constitution, which requires the Autonomous Communities to have a deficit limit of 0.14% of their GDP by 2020. In addition, Mas-Colell announced that an unexpected budget surplus will be placed into a new fund, the purpose of which will be to return public debt faster.

The Catalan Government approved a deficit ceiling for its own budget on Tuesday. Now the legal initiative will go to the Catalan Parliament, where it is expected to be approved without major problems before the end of the current year. The Catalan Finance Minister, Andreu Mas-Colell, emphasised the importance that Catalonia self-imposes this deficit limitation, in order to show its commitment with budget austerity, and “not only because it obeys the European Union”.

Mas-Colell explained that Catalonia wanted to send a clear message out after the reform of the Spanish Constitution to include a deficit limitation. The party running the Catalan Government, the Centre-Right Catalan Nationalist Coalition ‘Convergència i Unió’ (CiU), criticised the way the Constitutional amendment had been carried out, as Spain’s two main parties marginalised the rest. CiU was against the way the Constitutional reform had been debated, but not against the spirit of budget austerity, balancing revenues and public spending. Therefore CiU, and the Catalan Government, are now showing their commitment with budget stability with this new law, according to Mas-Colell. Furthermore, the Catalan law will be stricter than the Spanish Constitutional reform, as the deadline Catalonia has to reach a deficit ceiling of 0.14% is fixed in 2018, and not in 2020. Therefore, Catalonia has imposed a faster adjustment of its own budget on itself.

Catalonia will reduce its deficit gradually and transparently

Regarding the controversy with the Spanish Government over the deficit Catalonia should have in 2011, the Catalan Finance Minister stated that the Catalan Government’s stance has always been “rigorous” and “transparent”. The current Government took office last Christmas after elections in November. The previous Catalan Government, formed by three parties including the Socialist Party, which also runs the Spanish Government, left a public deficit of 4.2% for 2010, a figure that was confirmed last week by the external audit of all the Catalan Government’s finances. The current Government announced a deficit of 2.66% for 2011, reached by cutting public spending by 10%.

Mas-Colell has maintained over the last number of months that a more severe adjustment “is realistically not going to be completed in only one year”, considering the previous deficit. However, the Spanish Government is still asking for a deficit of 1.3% for 2011. On Tuesday, Mas-Colell repeated yet again that this objective “is unrealistic”, and that the Catalan Government has always been transparent with its deficit and its objectives. All these months, the Catalan Government refused to accept the 1.3% deficit objective imposed by the Spanish Government. It said it was unrealistic, and that the only way to reach this deficit objective would be through the payment of funds that the Spanish Government owes to Catalonia but that refuses to pay in order to reduce the central deficit. The Catalan Government has complained on several occasions about how the Spanish Government transfers its deficit to the Autonomous Communities, obliging regional budgets to pay for decisions taken unilaterally by the Spanish State. Therefore, Mas-Colell is assuming that Catalonia would have a deficit of 2.66% in 2011, and that in 2012, the deficit will be halved, representing 1.3%. Catalonia will continue to tighten its belt in 2013, and the deficit will represent 1.1%, and finally in 2014, it will be 1% of Catalonia’s GDP. Beyond the Catalan Government’s commitment, from now on, the new law will decide.

A fund to pay for the debt

In addition to the deficit limitation, the Catalan Law of Budget Stability foresees the creation of a fund that would help to pay for public debt in a faster way. Mas-Colell explained that this new fund might be used “to cancel debt or not to ask for new credits”. The fund will be filled with budget surpluses of the Catalan Government, when revenues “are higher than the estimations included in the budget”. Mas-Colell said that if this fund would have been created six or seven years ago, now its resources would have helped to balance the current Catalan budget, now that the real estate bubble crashed. Therefore, according to Mas-Colell, with this fund, Catalonia would be better prepared for a drastic decrease in revenues.

A deficit for the Spanish Government of 0.14%

Furthermore, Mas-Colell asked the Spanish Government to also impose a deficit ceiling of 0.14%, just like that of the Autonomous Communities. In Spain, the Spanish State is only responsible for half of public spending. Catalonia is responsible for more spending than most of the autonomous communities as it manages powers that others do not have, such as police, prisons or the promotion of the Catalan language. The Catalan Government spends almost as much money as the Spanish Government regarding residents in Catalonia. In addition, the Catalan Government pays exclusively for basic Welfare State services, such as healthcare, education and social inclusion policies. However, the Catalan Government has limited fiscal autonomy, and thus is completely dependent on the Spanish Government regarding revenue. Therefore, when the Catalan Government has to balance its own budget, it has a much more limited space than the Spanish Government, and it is much more likely to affect basic services. Nevertheless, the Catalan Government cut public spending by 10% in 2011. In order to reach a deficit of 0.14% in 2018, the Catalan Government will have to make considerable efforts. Mas-Colell asked the Spanish Government to also fix a deficit ceiling of 0.14% for its finances.

CiU and the Catalan Government asked for a new “economic agreement” with Spain

Considering the limited fiscal autonomy of the Catalan Government, CiU is defending an “economic agreement”, similar to those of the Basque Country and Navarra. CiU wants Catalonia to raise all its taxes and agree with the Spanish Government on the money it gives to pay for the services provided and investments made by the Spanish State, and for interregional solidarity. Several studies, including some from the Spanish Ministry of Economy, estimate that each year Catalonia gives the rest of Spain between 6% and 12% of its GDP for territorial solidarity, depending on the study and the calculation formula. This money leaves Catalonia each year and is used to pay for services and investments in other regions of Spain. It is known in Catalonia as a fiscal deficit. Assuming a fiscal deficit of 9% of the Catalan GDP, it would represent 18 billion euros per year. The Catalan Government’s deficit for 2011 represented 4.2% of the GDP, or 8.3 billion euros. Even with the lowest fiscal deficit stated in a study and corresponding to 5.9%, Catalonia would still be able to give 1.7% of its GDP in terms of regional solidarity without having any kind of budget deficit. However, to pass from a deficit of 4.2% in 2010, to a deficit of 2.66% in 2011, Catalonia had to cut public spending by 10%, in all government areas, including basic services such as healthcare or education.