Who pays for the public deficit? Autonomous Communities vs. the Spanish Government

Barcelona (ACN).- The Spanish Government demanded the Autonomous Communities to drastically reduce their public deficit despite the fact that they pay for basic services such as healthcare and education. The Autonomous Communities, lead by Catalonia, reminded the Spanish Government that they have a minimal deficit compared to that of the Spanish Government. In addition, they have demanded that Prime Minister Zapatero’s Executive make its own adjustments and avoid transferring its deficit to the budget of the Autonomous Communities. Since they do not agree with the demands and the financial markets are putting them under pressure, the Spanish Government is hoping to pass a law that will limit the deficit and debt of public administrations by linking it to the GDP growth. Catalan parties have pointed out that in practical terms this means that the Spanish Government will have the legal entitlement to oblige the Autonomous Communities to pay for Spain’s deficit. This will force Autonomous Communities to cut their expenditure even further, which will inevitably have an effect on the basic services provided to citizens.

According to Catalan President Artur Mas and the Catalan Minister for Finance Andreu Mas-Colell, the Catalan Government is at the limit of its expenditure reduction. Together with other Catalan parties, they asked the Spanish Government to fulfil their obligation to pay the money it owes to Catalonia. They claim a total amount of 3.3 billion euros: 1.35 billion owed from the Competitiviness Fund, 1.2 billion coming from transferable assets such as buildings and 0.78 coming from “institutional loyalty”. However, the Spanish Government refuses to pay, does not even feel obliged to do it and puts the pressure once again on the Autonomous Communities. Yesterday, the Spanish Deputy Minister for Finance asked Catalonia to go beyond the already announced 2.6 billion euros expenditure reduction and reach a total reduction of 5.8 billion euros. This means an additional budget reduction of 3.2 billion, which is completely out of the question, stressed Andreu Mas-Colell. And even more so when the Spanish Government should pay 3.3 billion to Catalonia, he added. Add to this the debate regarding the money Catalonia gives each year to the rest of Spain in terms of solidarity. Artur Mas warned on Monday in Madrid before an audience of businesspeople and politicians that Catalonia cannot give 9% of its GDP each year, or in money terms 18 billion euros, as an act of solidarity and at the same time be asked to drastically cut its public expenditure to levels that will damage basic public services. Meanwhile, international financial markets are keeping a close eye on developments. Spain needs to reduce its public deficit. Revenues are too low and the only way is reducing public expenditure. Can the Spanish Government use its force to make the Autonomous Communities pay for this deficit reduction? Can the Spanish Government do so when 76% of Spain’s public debt comes from this administration? The Autonomous Communities are those paying for basic services and they count for some 40% of Spain’s public expenditure. The Spanish Government is responsible for more than half of the 2010 public deficit. Can the Spanish Government continue putting the blame on the Autonomous Communities and not taking its own responsibility? These were the questions from Catalan political parties. Crossfire between the Catalan and the Spanish Governments has begun and the dispute was today transferred to the media and the Spanish Parliament, where Catalan parties joined in the battle.

Why reduce the deficit?

The economic crisis Spain is suffering from has meant an increase in public expenditure and a decrease in revenues. The consequences in the budget were an increase in the annual public deficit as well as in the total public debt, which is still not very high compared to its European neighbours. However, a delay in adopting political measures, the public deficit increase and Spain’s economic situation with an unemployment rate of 20%, the real estate crash, and the amount of private debt caused a lack of trust from the international financial markets. Once the political measures to reactivate the economy are adopted, they are expected to have an effect on the economic situation. Therefore, pressure from the markets is not any more on the measures and has focused on the public deficit. It needs to be reduced. No discussion allowed. Economic recovery is slow and unemployment remains at the same high levels, revenues are still at low levels and public expenditure remains high. This is the perfect formula to generate a deficit. Markets are keeping a close eye on events and there is a need to reduce the deficit. This means reducing expenditure, increasing revenue or a combination of both.

The Autonomous Communities have limited fiscal autonomy and the majority of their revenue comes from the Spanish Government. When we apply the logic of reducing their deficit, they need an increase of revenue from the Spanish Government, a decrease of their own expenditure, or a combination of both. The Spanish Government is facing a decrease of revenues and an increase in expenditure, mainly due to unemployment subsidies. The Catalan Government and Catalan political parties have accused the Spanish Government of reducing its own expenditure by reducing the money it gives to the Autonomous Communities, while it is not making enough efforts to reduce other spending it manages. They accuse the Spanish Government of not committing to the already agreed amounts of money that legally have to be transferred to Catalonia. Therefore, Catalonia suffers from an additional revenue reduction, which corresponds to Spanish Government arrears and lack of payment. This puts Catalonia’s budget in jeopardy.

The Spanish Autonomous Communities have a public deficit objective of 1.3% for 2011. In 2010, Catalonia had a public deficit of 3.86%. The current Catalan Government’s austerity and stability plan foresees reducing public expenditure by 2.6 billion euros, a 10% reduction. However, this would not be enough to meet the 1.3% objective if the Spanish Government keeps reducing the Catalan Government’s funding and does not pay its arrears. If the Spanish Government does not pay what it owes, the Catalan Government would have to cut more than 20% of its expenditure, or in money terms 5.8 billion euros. These levels of budget reduction are unsustainable and “not serious” for a rich region that gives each year 18 billion euros to the rest of Spain as solidarity, underlined the Catalan President Artur Mas and the Catalan Finance Minister Andreu Mas-Colell.

Crossfire between the Catalan and the Spanish Government

The Catalan President Artur Mas warned on Monday in Madrid that his Government could not further reduce expenditure without drastically cutting basic public services such as healthcare and education. He also warned that, if the Spanish Government does not fulfil its obligations towards Catalonia, the 1.3% deficit objective would not be met in 2011. Yesterday, the Spanish Deputy Minister for Finance Carlos Ocaña demanded Catalonia to meet the 1.3% deficit objective and asked the Catalan Government for an additional expenditure reduction of 3.2 billion euros. Today, the Catalan Minister for Finance, Professor Mas-Colell refused to do so and he demanded the Spanish Government meet previous agreements and pay the money it owes to Catalonia. The Catalan Government has claimed 3.3 billion euros from the Spanish Government; an amount they are not willing to pay at the moment. Mas-Colell accused it of reducing its own deficit by shifting it to the Autonomous Communities, such as Catalonia. “This is not serious”, criticised Mas-Colell, who was Professor of Economics at Harvard University for 14 years.

Dispute at the Spanish Parliament

The accusation that the Spanish Government has transferred its deficit to the Autonomous Communities by not paying the money it owes, was made public today by several Catalan parties in the Spanish Parliament. They also pointed out that Autonomous Communities are responsible for more than half of Spain’s public expenditure and they have to manage basic public services. The spokesperson of the Centre-Right Catalan Nationalist Coalition, Convergència i Unió (CiU), which controls the Catalan Government, Josep Antoni Duran i Lleida stressed that the Spanish Government is responsible for 76% of Spain’s total public debt. Duran stated that the Government led by Prime Minister José Luís Rodríguez Zapatero is the one “to make the biggest effort”. In addition, he explained that the Autonomous Communities are only responsible for one sixth of Spain’s total public debt. Joan Ridao, spokesperson of the Left-Wing Catalan Independence Party, Esquerra Republicana de Catalunya (ERC), accused Zapatero of damaging the image of the Autonomous Communities. He quoted Zapatero’s interview to the Financial Times where he said, “the autonomies must fulfil their obligations, otherwise the State will act”. Ridao stressed that Catalonia has fulfilled its obligations, however the same cannot be said about the Spanish Government towards Catalonia. Spokesperson of the Catalan Green Socialist Party, Iniciativa per Catalunya (ICV), Núria Buenaventura stated that linking public expenditure to GDP is “nonsense”, “inspired by Reaganism and ultra-liberalism”.

When answering questions put to him, Zapatero admitted that the Spanish Government has 76% of Spain’s total debt. However, he added that “a large part” of this debt is “to fund” the expenditure made by Autonomous Communities and local councils. Zapatero also explained that the law his Government is preparing would oblige the Spanish Government and the municipal councils to use any budget surplus to reduce public debt. In addition, he said that any public expenditure increase would not be able to surpass the growth of the Spanish economy. This rule will be passed on to the Autonomous Communities through the Council of Fiscal and Financial Policy, which brings together the Spanish Government and the Autonomous Communities except the Basque Country and Navarra, which have a different funding model.

Catalonia gives 9% of its GDP each year to the rest of Spain

Catalan President Artur Mas pointed out on Monday in Madrid that Catalonia gives 9% of its GDP each year to poorer regions; a quantity that totals 18 billion euros each year. This amount is seen by some sections of Catalan society as fiscal plundering, and heavily burdens the Catalan economy in a time of crisis. Mas agreed with the principle of regional solidarity, but set limitations to inter-regional transfers. Catalonia cannot, on the one hand, give 18 billion euros and, on the other hand, be asked to reduce its public expenditure by more than 20% by the Spanish Government, while the Spanish Government owes Catalonia 3.3 billion euros from the current budget.