The European Commission recognises Catalonia’s “budget cuts of unprecedented proportions” to reduce the deficit

Barcelona / Brussels (ACN).- Spanish Autonomous Community deficits are in the spotlight. The discussion about the deficit of Autonomous Community Governments began in Madrid some months ago, but it has reached international relevance now that Moody’s and the European Commission have focussed their analysis on it. On Thursday, the European Commission’s spokesperson for Economic Affairs, Amadeu Altafaj recognised Catalonia’s “budget cuts of unprecedented proportions” to reduce its own public deficit. In addition, he added that Catalonia is making “a different effort” to the rest of Spain’s Autonomous Communities, as not all the regional governments are making the same efforts to control their public expenditure. Altafaj insisted that “all the Communities need to be equally obliged to fulfil” the austerity requirements. Nevertheless, Brussels “appreciates” the “Catalan executive presented a 10% budget cut”. These statements nuanced those made earlier this week by the EC itself and by Moody’s. On Monday, the American rating agency Moody’s criticised the Catalan Government’s deficit for 2011; and on Tuesday it was the European Commission that criticised Spain for not controlling the finances of the Autonomous Communities. While presenting the last economic forecast, the President of the European Commission Jose Manuel Durao Barroso and the European Commissioner for Economic and Monetary Affairs Oli Rehn insisted that the Spanish Government must “strictly” implement the mechanisms to control “the deficit and debt from regional governments”, in order to meet the 6% objective for the whole of Spain. The day before the EC issued its forecast, Moody’s said that the Catalan public deficit could jeopardise Spain’s entire solvency in the international markets. However, this Thursday, Fitch, another rating agency, undermined that risk, despite being “a hot topic”. Last week the Catalan Government presented its budget for 2011 with a deficit of 2.66%, instead of the 1.3% objective set by the Spanish Government and some regions but not Catalonia. The Catalan Minister for Finance, Professor Andreu Mas-Colell, insisted that if the Spanish Government showed some institutional loyalty and paid what it owes to Catalonia in 2011, the Catalan Government will be able to meet the deficit objective. Mas-Colell said that he has not given up on receiving the money and if Madrid fulfils its legal obligations and pays, the Catalan deficit for 2011 will be reduced and will meet the objectives outlined. Mas-Colell insists that he prefers modifying the deficit for 2011 to reduce it, instead of doing the opposite and losing credibility. He also explained the Catalan Government cannot cut the budget more than 10% in only one year without drastically affecting basic Welfare State services.

The European Commission put the Autonomous Community deficit in the spotlight

On Tuesday, the European Commission warned Spain of the need to control the deficit of the Autonomous Community governments. Brussels did not make any distinction between the different financial situations of the 17 Autonomous Communities. Neither analysed regional government shares regarding Spain’s public debt and deficit. EC President Durao Barroso and European Commissioner for Economic and Monetary Affairs Oli Rehn asked Spain to “strictly” implement the mechanisms to control “the deficit and the debt from the regional governments”, putting these administrations in charge of providing the main Welfare State services in the spotlight.

Two days later, this Thursday, the European Commission’s Spokesperson for Economic Affairs, Amadeu Altafaj nuanced Tuesday’s statements. Now the European Commission recognises the Catalan Government’s “budget cuts of unprecedented proportions”. Altafaj also insisted that Catalonia is making “a great effort”, “a different effort” to the rest of Spain’s Autonomous Communities. He stressed that “of course Brussels takes this [effort] into account” and “appreciates” the “Catalan executive presented a 10% budget cut”. The President of the Catalan Government, Artur Mas stated that today’s statements by the European Commission are “an endorsement to the austerity policies” implemented by Catalonia.

However, on Tuesday Barroso and Rehn asked to limit by law “regional government expenditure” linking it to the annual growth of GDP; a measure that would reduce the already limited fiscal autonomy of Spain’s regions regarding for instance their capacity to issue debt. In Catalonia, this trend might be seen as a re-centralisation of the Spanish State, going in the opposite direction to a federal state model and thus directly attacking Catalonia’s self-government. If this reform was passed it would have political consequences in Spain’s fragile territorial balance.

Besides, Barroso and Rehn asked the Spanish Government to raise energy taxes and the TVA, in order to increase revenues, as well as modifying worker’s social contributions.

Salgado answered the European Commission

The Spanish Vice President for Economy Elena Salgado answered the European Commission’s economic forecast qualifying it as a superficial analysis when it came to recommendations regarding her portfolio, but she said she agrees with the analysis regarding the Autonomous Community government deficit. She said that the EC recommendations regarding energy taxes, VAT and social contributions would not be on the agenda “for many terms”, picturing a scenario of at least half a decade. However, she fully agreed when it came to the recommendation regarding limiting the Autonomous Community Government’s deficit and expenditure.

Salgado talked this week to the Opposition leader and President of the Spanish People’s Party Mariano Rajoy about the need to limit by law the expenditure of the Autonomous Communities and link it to the GDP growth, despite the Communities’ legally recognised autonomy over their own finances.

Autonomous Communities represent a small share of the deficit and the debt

The Autonomous Community governments provide basic Welfare State services in the territory they rule, such as public healthcare, education (including universities), and social services. The Catalan Government is even in charge of police and prisons. Globally, Autonomous Communities are in charge of about 40% of  Spain’s total public expenditure. Taking Spain’s global deficit objective of 6% for 2011, Autonomous Community governments are only allowed 1.3% of Spain’s GDP. Therefore, the deficit of regional governments represents 21% of the country’s total deficit, while they are responsible for some 40% of public expenditure. Besides, looking at Spain’s public debt, the Autonomous Communities are only directly responsible for some 17% of it, as most of it corresponds to the Spanish Government. However, the Spanish Government has put the Autonomous Communities in the spotlight, and all of them in the same category; an analysis that is now reproduced by some international actors such as Moody’s or the European Commission, although some nuances are started to be introduced.

The Catalan Minister for Finance Andreu Mas-Colell denounced on Tuesday that the Spanish Government, responsible for 50% of the expenditure in the country, has much more room to plan budget cuts. He insisted that budget cuts need to be made by all the administrations, and not only by some Autonomous Governments. All the regional governments need to implement austerity plans, as well as the Spanish Government itself, he said.

Catalonia is already implementing an austerity plan that has reduced public expenditure by 10%

The Catalan Government has already cut public expenditure by 10% in 2011, a “great effort” “appreciated” by the European Commission, as the EC Spokesperson for Economic Affairs recognised today. Catalonia will not and cannot go further in the budget cuts without drastically affecting basic services, explained Mas-Colell. However, the Spanish Government refuses to pay money that it legally owes to Catalonia in 2011, which would reduce the Catalan deficit, insisted Mas-Colell. If Madrid does not fulfil its legal obligations towards Catalonia, then Catalonia will not meet the deficit objective, he said. He accused the Spanish Government of having a “manipulating” speech and transferring its own public deficit to the regional governments by not paying what it owes and by taking measures that increase the expenditure of the autonomous communities.

If the Spanish Government pays all the owed money, Catalonia will meet the 1.3% deficit objective for 2011

Catalonia gives around 9% of its GDP to the rest of Spain in terms of solidarity each year, which represents some 18 billion euros. Currently, 2.85 billion euros separate the Catalan Government to meet the 1.3% deficit objective this 2011. The Spanish Government should pay 1.45 billion euros corresponding to this year Competitiveness Fund, but does not want to pay this now but instead in 2013. The Catalan Government has not counted this money and if the Spanish Government pays this money on time, the Catalan deficit will be closer to the deficit objective, although 1.4 billion euros would still be lacking. This 1.4 billion euros should come from two other items: the money the Spanish Government is legally obliged to deliver to Catalonia in order to compensate for a recognised historical lack of investment (between 0.8 and 1.2 billion euros in 2011, depending on the calculation formula) and transfers of real estate properties owned in Catalonia (between 200 and 600 million euros). Therefore, if all that money is finally transferred, Catalonia could even be below the 1.3% deficit objective. However, the Spanish Government refuses to pay in 2011 and has asked Catalonia for greater expenditure cuts, which would shock Catalan hospitals, universities, primary schools, and prisons. This mechanism is what Mas-Colell denounces as “transferring the Spanish Government deficit to the Autonomous Communities” and then blaming them for not meeting the deficit objective.

Almost no public works in Catalonia but a 3.85 billion euro High Speed Train to Extremadura

Meanwhile, the Spanish Government still acts as if Spain was one of the world’s richest countries and insists on building High Speed Train railways to sparsely populated areas, with small economic weight, such as Extremadura. At the end of April it invited tenders for the High Speed Train from Madrid to Extremadura and allocated 3.83 billion euros for it in 2011. The Catalan Minister for Finance stated that this infrastructure was not a priority, especially when Portugal already announced that it will not build its part and thus the train will have to stop at the border. Mas-Colell’s words provoked anger from the President of Extremadura, Spain’s region with the lowest GDP per capita. In Spain’s regional elections held last May 22^nd in most of the Autonomous Communities, Extremadura was the only region where the Socialist Party won. The Socialist Party runs the Spanish Government.

The Spanish Government blames Catalonia and the Autonomous Communities

On Wednesday the Spanish Minister for Public Works and Deputy Secretary General of the Spanish Socialist Party, José Blanco criticised Mas-Colell’s late statements. Blanco said the Catalan Government wanted all the Spanish Government’s public works investment to be done only in Catalonia. The Catalan Government already warned three weeks ago that from all public works tenders in Spain issued in 2011, less than 0.5% were in Catalonia. Catalonia represents about 19% of Spain’s GDP and 17% of Spain’s population.