Outrage in Catalonia after Spain cuts regional deficit targets and denies compensation for VAT rise

Barcelona (ACN).- The relationship between the Catalan and Spanish governments is at a “turning point” after a “bad” meeting in Madrid on Thursday, as government officials put it. The summit between the Spanish minister Cristóbal Montoro and the ministers for the Economy of the 17 autonomous communities in Spain was a “defeat” for Catalonia, according to the Catalan minister Andreu Mas-Colell. In Madrid, Montoro announced a new cut in the regional deficit targets, from 1,1% to 0,5% for 2013, and from 1% to only 0,1% the year after. This comes after Brussels allowed Spain to achieve its own deficit targets one year later than previously stated, thus giving Madrid more time to meet its obligations.

But the Spanish government of Mariano Rajoy did not want to apply to the regions the same flexibility that Brussels applied to him. On the contrary, he decided to harden the regional deficit targets in a move that outraged Catalan minister Andreu Mas-Colell and forced him to vote ‘no’ to the new objectives. Catalonia has been implementing harsh austerity measures since 2010, including cuts into public workers salaries and significant reductions in Public Health and Education spending. The government announced in May a new round of austerity measures – the third- that now would probably not be enough to meet the new deficit targets. If Catalonia or any other region does not comply with the dictates of Madrid, it faces the possibility of a political intervention from the Spanish government. Mas-Colell said on Friday that he is ready to speak directly to Brussels in order to negotiate the Catalan economical situation if such an intervention was to become reality.

The Catalan government feels Spain is treating “all regions the same” and considers this to be unfair because Catalonia has been implementing austerity measures and reforms for longer than anyone else. The government spokesman Francesc Homs said in an interview on Friday that Madrid “treats in the same way those who have done their homework and those that not”. According to him, “the Spanish government is kicking Catalonia” and this is forcing a “turning point” in the relationship between the administrations.

“By the end of the year we will have to make significant decisions, and it won’t be easy”, said the spokesman, who said Catalonia needs a new fiscal arrangement and did not deny the possibility of new austerity measures in the future. “There are enough elements in our country to assume that we can take a different path despite its costs”, he added, in a series of comments that highlight the growing tensions between the Spanish and Catalan governments.

The new fiscal efforts required by Madrid are likely to asphyxiate the Catalan economy, because they will add pressure to an already critical situation. The Catalan government has long been campaigning for a new ‘fiscal pact’ with Spain. Catalonia wants to be able to raise and manage all taxes, in a system of full fiscal autonomy similar to the one enjoyed by the Basque Country and Navarre. Currently, Catalonia gives 9% of its GDP to the rest of Spain every year. While the Government recognizes the need for solidarity with the poorest regions of Spain, it argues that this percentage is far too high and is dampening the possibility of Catalonia paying for its own services. When coupled with the spending review efforts, this situation further dampens the sustainability of the Catalan public finances.

In fact, Catalan President Artur Mas has always argued that the current spending cuts implemented by his government would be less severe were Catalonia able to manage all its money directly. In other words, Catalonia would be better off with full fiscal autonomy from Spain and would meet the deficit targets without much difficulty.

VAT compensation

The Catalan government was also angered by the refusal from Madrid to “compensate” the regions with some kind of participation in the VAT revenue increase. Catalonia is expected to pay €100 million every year because of this tax increase, but the government won’t be able to use any of this money to finance its services because it will be dealt with directly by Madrid. Also, Madrid refused to confirm whether it will pay its debts to Catalonia and which kind of income will be offered to the regions. The minister Montoro said that this “doesn’t matter” and that deficit targets would have to be met “anyway”. However, Catalonia has not been paid a lot of the money included in the legislation in recent years. For instance, the Spanish government has not paid in to the Generalitat, the legally-binding competitiveness funds, in the last two years or paid its infrastructure debts in Catalonia. All of it amounts to more than one million euros. By not paying, Madrid avoids increasing its own deficit while at the same time having an adverse effect on the Catalan one, because some of this money was expected to be received and therefore has been considered as income in the Catalan budget.

The Catalan minister for the Economy, Andreu Mas-Colell, criticized Spain blaming the autonomous communities for all the problems while they represent only about 17% of all Spanish public debt and pay for most services, such as Health and Education. He said this might seem a useful strategy for Spain in the short-term, but added that “soon enough” markets and Brussels will realize the big hassle is in the central government finances. “The Spanish government thinks it is sending the message that it keeps the regional finances under control and that Europe will applaud that and that’s it. They will, maybe, for three days, but then they will start to wonder whether or not the central government is as harsh with itself as it is with the autonomous communities”, said Mas-Colell.