Catalonia's financial suffocation

Catalan Minister of Finance Andreu Mas-Colell has announced that the Catalan government won't be able to meet the deficit target this year, which was set at 1 per cent of the GDP by the Spanish government. Moreover, it seems unlikely that it will do so in 2015, as the target will then be even lower (0.7 per cent). The only way these goals can be met is by making further cutbacks, which would have a negative social impact. Hence president Mas' demand, in his recent meeting with president Rajoy, for a higher deficit limit for the Catalan administration.

Let's not forget that the European Commission sets the deficit goal for the entire Spanish public sector and Rajoy's government decides the objective for every level of the administration: central, regional and local. The idea is that the deficit of these three levels, when added up, must not exceed the total limit set by Brussels. It would seem reasonable for the deficit limit assigned to each level to be commensurate with its relative weight; that is, with the percentage of the total expenditure it accounts for. At present, the central government is responsible for 58 per cent of the overall expenditure of the Spanish public sector; the regional governments account for 31 per cent and local councils 11 per cent. Well, the way the Spanish government has chosen to divide up the deficit is not consistent with these percentages. Rather, it reserves 83 per cent of the deficit (set at 5.8 per cent of the GDP in 2014) for the central administration, allocating 17 per cent to the regional governments, which are responsible for about a third of the overall expenditure. Therefore, in 2014 the central administration is allowed a deficit of 4.8 per cent of the GDP, while the regions are only permitted 1 per cent. Local governments are not allowed any deficit. This distribution of the deficit limit is grossly unfair and it all but suffocates the finances of the Catalan government while hindering the provision of public services as essential as education or health care, which in Spain are run by the regional governments.

Furthermore, this suffocation is unlikely to ease up. The regional finance system was up for review last year and the new one should have come into effect in 2014. It didn't happen then and it looks as if it won't happen in 2015, either. The greatest disfunctionality of the current regional finance system is that it fails to abide by the so-called principle of ordinality, inspired by the finance system of the German Länder, where this principle began to apply after a ruling of the Federal Constitutional Court.

The principle of ordinality compares the relative position of every region in terms of funding per capita, before and after the interregional mechanism of redistribution of funds kicks in. That is, if you rank the regions by funds per capita before the redistribution, the resulting order must remain the same after the redistribution. The current finance system clearly dismisses this principle. For instance, in 2012 Catalonia ranked third in terms of tax potentiality, 19 points above the average contribution per capita of the Spanish regions within the common system (the Basque Country and Navarre have their own specific finance system and aren't included here). However, it came tenth on funds available per capita after the redistribution mechanism was applied, hovering just below the Spanish average. Therefore, the redistribution of funds is massive and, what's more, it's arbitrary because while Catalonia drops to number 10, other regions with a much lower-than-average tax capacity move up several places and receive more funds per capita than Catalonia; for example, Extremadura.

When the principle of ordinality is ignored, regions with lower income suddenly have more funds than the wealthier ones. This is unheard of in devolved federal countries and the 2009 finance system failed to redress the situation. When we analyse the data of a historic series, we can clearly see how this problem has always been present in the regions' finances.

In the last meeting of the Council of Fiscal and Financial Policy, Spanish Minister of Finance Cristóbal Montoro chose to give the regions a little something by lowering the interest rate they have to pay when they borrow from the Regional Liquidity Fund. But this move appears to be a poison apple, as other recentralising measures are being brought in to balance it all off.

To sum up, the chokehold on Catalonia's finances is only getting worse. This reality is unacceptable if we bear in mind that, first of all, Catalonia makes a net contribution of about 8 per cent of its GDP every year to Spain's coffers; and, secondly, without this contribution --in an independent Catalonia-- the fiscal gain for Catalonia's finances would be about 6 per cent of the GDP, according to reports by the CATN (1), after provisions were made for the new institutions and the new matters that Catalonia would take over had been paid for.

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(1) N.T. CATN stands for Consell Assessor per a la Transició Nacional (Advisory Committee for the National Transition); it is a committee of experts appointed by the President who advise the Catalan government on the independence process.