Deficit distribution and recentralization

The allocation of a deficit objective to every level of administration has shown, once again, Madrid’s centralization drive and its distrust of Spain’s regional governments.

At the last meeting of the Council for Fiscal and Financial Policy, Minister Montoro gained approval --in a second vote and by resorting to the Spanish government’s qualified majority (they have 51% of votes reserved)-- for the regional deficit objective to be set at 0.3% of GDP in 2016, 0.1% in 2017, and 0.0% in 2018. The same objective for local councils had been approved days before, as in previous years, at 0.0% for all three years in question. On the other hand, the objectives for the central government are 2.5% in 2016, 1.3% in 2017, and 0.3% in 2018.

To what do we owe a distribution so favorable to the central government? Simply to political will, as it is Madrid that sets, at its convenience, the distribution of these objectives. The most reasonable thing would be to define a rule, or clear and pre-established criteria, on which to base this distribution. One possibility would be, for example, to allocate the deficit objectives according to the relative weight of each region’s expenditures in the total. Under this plan, the central government would have to take on 58% of the deficit objective, regional governments 31%, and local authorities 11%, as this is the proportion of expenditures by level of government. Madrid, however, has reserved for itself 89% of the deficit objective for 2016, while the regions have been assigned only 11%, and the local authorities 0%. The distribution is similar for the following years.

This is a very deliberate political strategy that is aimed at discrediting the management of the regional administration and encouraging citizens to favor recentralization.

The tactic consists of transferring responsibility for the welfare state --healthcare, education, and social services-- to the regions, along with minor items. Remember that these three major areas account for almost 80% of non-financing expenditures for the autonomous regions. But this transfer of responsibilities is not accompanied by a good financing model that guarantees sufficient resources to cover the cost of these expenditures. Everyone is aware that the current model has many flaws and that it is essential to reform it because it doesn’t ensure proper financing for the devolved responsibilities. In addition to not providing the resources needed, the model affords very little fiscal sovereignty to the regions, which does not allow them to increase or make decisions on their own resources. And when a region, especially Catalonia, has tried to introduce a new tax or instrument to raise additional revenue, the central government has challenged them in court. This is the case, for example, of the one euro tax for healthcare, or judicial taxes. To alleviate this funding insufficiency for the regions, instead of increasing resources provided by the financing model, minister Montoro set up a line of credit, the FLA. In this way, if the regional governments need more resources, they have to request them from Madrid in the form of a loan, with the applicable interest to be paid.

This is the perfect strategy for discrediting the management of the autonomous regions in Spain: devolve powers to them (such as the law on dependents), do not reform the financing system nor give more resources, and set unattainable deficit ceilings. Thus, the only way for regions to balance their books is to make more budget cuts, with the consequent social costs after five consecutive years of continuous budget reductions.

But by acting in this way, the central government is trying to achieve its objective, which is nothing less than to make citizens distrust the regional governments and endorse the idea of recentralization, as the central government has the financing capability to be able to manage these areas better and more efficiently. This tactic has been strengthened in the new political scenario, in which --following the recent regional elections in most of Spain-- the PP has stopped governing some of the larger, flagship regions.

With this suffocation of the regions, coupled with the electorally oriented measures that the PP government is rolling out (like the reduction in IRPF --income tax), their political strategy becomes much clearer. All of these actions are aimed at strengthening the image of the central government at the expense of the autonomous regions. We have to keep this very much in mind and, above all, remember who is ultimately responsible for the budget cuts.