The Spanish Government imposes a 1.58% deficit target for Catalonia and €2.6 billion of further budget cuts

Barcelona (ACN).- The Spanish Finance Minister, Cristóbal Montoro, announced on Wednesday that the Catalan Government will finally have to meet a 1.58% deficit target in 2013, after several months of talks. The figure is far below the expectations of the Catalan Government which had previously stated that any figure below 1.8% was “totally insufficient” and was pressuring for a 2.1% deficit target. Furthermore, Barcelona’s Chamber of Commerce stated today that no deficit target below 2% would be “fair”. The 1.58% deficit target finally imposed on the Catalan Government by the Spanish Executive represents €2.6 billion of further budget cuts compared to last year’s budget, which ended with a 1.96% deficit. The Catalan Finance Minister, Andreu Mas-Colell, accused the Spanish Government of “asphyxiating” the Autonomous Communities. The former Harvard Professor made these accusations after knowing that, in 2014, the Spanish Government will fund the Catalan Executive with €500 fewer million than in 2013, although revenue from taxation is expected to increase following an improvement of the economic situation. Furthermore, once in the Fiscal and Financial Policy Council (CPFF) meeting (where the Spanish Government announced the new deficit targets for the Autonomous Communities) Mas-Colell denounced that the Spanish Executive was “keeping for itself the greatest share of the deficit pie”, while it is only responsible for 50% of Spain’s public spending. The Spanish Government is keeping for itself a deficit target of 5.2% for 2013 and most of the flexibility allowed by the European Union, which authorised a 6.5% deficit for Spain’s total public sector. Meanwhile, the Autonomous Communities have a deficit target 4 times stricter, although they manage 36% of Spain’s total public spending and basic services such as healthcare and education.

Montoro confirmed at the CPFF meeting what had been leaked weeks ago, that in 2013 Spain’s Autonomous Communities will have different deficit targets, although their average will be 1.3%. According to Mas-Colell, the way deficit targets have been split between different government levels and Autonomous Communities is “a mockery”. Catalonia, Asturias, Canarias and even Madrid – which like the Spanish Government is also run by the People’s Party – rejected the distribution. However, Madrid rejected because it was against setting different target levels for the regional governments. On top of this, Montoro announced that in 2014 the Autonomous Communities will all have to meet the same deficit target, which will be 1%, while the Spanish Government’s will be 4.8%. The Catalan Left-Wing Independence Party (ERC) stated the Spanish Government’s attitude towards Catalonia was “grotesque”, particularly because Catalans are obliged “to beg for a loan to recover a fraction of the public resources that each year leave Catalonia”. The ERC was referring to the money paid by Catalan tax payers that leaves Catalonia and goes to pay for investments and services in the rest of Spain, an amount known as ‘fiscal deficit’. According to the latest studies, in the last 25 years Catalonia has been obliged to donate an average of 8.5% of its GDP, which represented €16.5 billion per year in 2011. If this fiscal deficit was halved, the Catalan Government would show a budget surplus and would be reducing its debt. Instead, the Catalan public services are under-budgeted and Catalonia’s fiscal pressure is one of the highest in Spain.

Waiting for the deficit target to be set

The Spanish Government’s decision to finally impose a 1.58% deficit target to the Catalan Government will not be welcomed in Catalonia since it is far stricter than the figure expected. The Catalan Government has been waiting several months to know the final deficit target decided by the Spanish Government in order to approve its budget for 2013. Catalonia’s Executive, run by the Centre-Right Catalan Nationalist Coalition (CiU), was refusing to approve a budget and having to totally modify it after the Spanish Government was changing the deficit target. In early 2012, the Spanish Government had imposed a 0.7% deficit target for 2013, but the current recession showed it was totally unrealistic and Madrid decided to raise it up to 1.2% last Spring. In June it raised it again to 1.3%, after knowing that the European Union was providing Spain with greater flexibility. It also announced that the each Autonomous Community would have its own different deficit target. In parallel, the Catalan and the Spanish Governments had been talking over the past months in order to set a reasonable deficit target for Catalonia and to set them as soon as possible. The figure was initially expected by May, then by June, and it finally came in the last day of July just before the summer holidays and the start of the 8^th month of the year.

Expecting a deficit target of at least 1.8%

The President of the Catalan Government, Artur Mas, had stated that “any figure below 1.8%” of Catalonia’s GDP would be “totally insufficient” and would mean undertaking “many budget cuts”. However, the Catalan Government was pressuring to obtain a 2.1% deficit target. Mas has warned that, if the final deficit target was unrealistic, the Catalan Government will continue working with last year’s budget, as it has been doing for the past few months. In fact, Mas was also pressured by the ERC – with whom the CiU shares a parliamentary stability agreement – since it needs its votes to pass the budget in the Catalan Parliament. The ERC was refusing to vote for any budget with a deficit target below 2%. However, in the last days, the ERC has said that they would consider voting for a budget with a 1.8% target. Furthermore, the Catalan business community, though Barcelona’s Chamber of Commerce, has been repeating in the last few weeks that any target below 2% would be “unfair”, considering Catalonia’s fiscal deficit, the historical lack of investment by the Spanish Government in Catalonia, the current high taxation levels and the budget cuts implemented in the last years.

€2.6 billion of further budget cuts

In fact, the new deficit figure imposed by the Spanish Executive obliges the Catalan Government to undertake €2.6 billion of further budget cuts compared to 2012. Last year, the Catalan Government posted a 1.96% deficit, after almost €4 billion of budget cuts implemented in the last two years. Passing from a deficit of 1.96% of Catalonia’s GDP to one of 1.58% represents an adjustment of around €800 million. On top of this, the Catalan Government will have to adjust €1.8 additional billion compared to last year’s budget, as a result of greater interest, pending payments and the lack of exceptional revenue. In 2012, the Catalan Government obtained €1.34 billion of exceptional revenue by privatising public services, a policy that can no longer be carried out. In addition, the interest rates for the loans contracted will increase by €350 million this year. On top of this, the Catalan Government will have to pay €150 additional million compared to last year’s for payments of infrastructure work split over time.

The Catalan Finance Minister says the new deficit target is “a mockery”

Andreu Mas-Colell stated he was “very deceived” by the 1.58% deficit target, which he considered “intolerable”. The Catalan Finance Minister was particularly angry about how the deficit targets had been split among the different government levels and the Autonomous Communities. In addition, he referred to the announcement that, in 2014, the Spanish Government will transfer €500 fewer million to the Catalan Executive, despite calculations showing that revenue will increase next year because of the improved economic situation. Mas-Colell, who was formerly a professor at Berkley and Harvard, stated it was “an intolerable mockery”. In addition, he said that “the perspective for 2014 will not help to improve the climate between Catalonia and Spain”. The Catalan Finance Minister also criticised that the Spanish Government is imposing for 2014 the same deficit target for all the Autonomous Communities. Mas-Colell explained that “uniformity has won over rationality” and he added that “the Meseta [Spain’s central plateau] has won over the Mediterranean”.

An economic “asphyxia” to recentralise power

For all these reasons, Mas-Colell stated that the Spanish Executive is continuing with its plan to economically “asphyxiate” the Autonomous Communities in order to make them unable to take care of all the public services with the intention of recentralising power again. In the Catalan case, this strategy would also be linked to weaken Catalonia’s self-government institutions, in an attempt to weaken the support for greater autonomy and independence.