The arbitrariness of deficit objectives

ALBERT CARRERAS Catedràtic d'Història i Institucions Econòmiques del Departament d'Economia i Empresa de la Universitat Pompeu Fabra. Director d'ESCI-UPF

The recent warnings (ARA, Friday February 5th) from the European Commission to the Kingdom of Spain regarding its predicted failure to comply with the deficit objectives for 2016, and regarding the need to reduce it by some 8.6 billion euros must be cause for alarm for everyone, but especially for Spain’s regions, which are bound to shoulder the bulk of the new cutbacks that the General Administration of the State will dictate.

On the scale of the Eurozone, the setting of deficit objectives is agreed to between the countries in the stability and growth agreements connected with the launching of the euro. When determining the adjustment trajectories that must correct what is known as "excessive deficits" there are technical, economic and statistical criteria, which take into account that some expenses are particularly cyclical. The "procedures for excessive deficit" are highly regulated and calibrated.

In contrast, Spain does not follow the same criteria at home. They did so, on paper, in the law of budgetary stability that was approved in 2012. They mirrored the criteria defined in the procedures for excessive deficit. They were reasonable and gradual adjustment trajectories. But when the time came to apply them, the PP government forgot what their own law and community practice determined, and preferred another law, the “law of the funnel”, which was more favorable to them. It's a wonder that the Madrid-based Spanish press, whether economic or general, always forgets the contrast between an agreed-upon method for setting objectives on a European scale and the undisguised arbitrariness within Spain. The deficit objectives for the regional administrations are impositions without political or moral legitimacy that are in direct conflict with providing end services for direct aid to people, instead of reducing the duplicate policies and administrations that Madrid wants to protect.

Indeed, the Treasury Ministry decided that cutbacks in the first years of would have to be shouldered by the regional and local authorities, and that the General Administration of the State would do it later --while waiting for the recovery that would have to come to save them the trouble. Thus, instead of distributing the efforts for deficit reduction in proportion to the spending done by each level of administration, which is approximately what the previous government of the PSOE had done, they decided to centrifuge the deficit and make it fall principally on all the regional governments that were not governed by the PP, and the legal challenge, correctly argued from a technical point of view, was filed as an administrative economic appeal before the Supreme Court, which has yet to rule. If the figures had been worked out properly (as recorded and documented in a report that was published recently by the departments of the Vice-presidency, Economy, and Treasury), then in 2013, instead of the Treasury Ministry calling for all of the autonomous regions to meet a deficit of 0.7% of GDP (which after much effort was raised to 1.3%, that could be asymmetric and that the Generalitat of Catalonia was responsible for 1.58%), we should have been allowed … 2.5%! The 1.96% achieved would not have been a deviation at all, and we still would have been able to avoid cutting spending by over one billion euros.

In 2014, instead of the 1% set by the State, we would have been fine with a deficit of 2.24%. In 2015, instead of the 0.7%, 1.62% would have been sufficient. And in 2016, instead of the 0.3% that Treasury will require the Generalitat to meet, we should have 1.09%, which would mean some 1.6 billion euros more available for the treasury. The State has centrifuged the deficit. There is no doubt about it! And what's more, it has rationed liquidity discretionally.

The blow that the State dealt the autonomous communities in 2013, which was extremely hard (to lower the deficit target from 1.3% to 0.7% in the middle of an intensifying crisis), was done using the excuse of a deficit correction imposed by Europe. But on that occasion the European Commission gave a greater (I repeat: greater!) margin of deficit to Spain and, instead of distributing that out to the other administrations, Madrid kept it all for itself and grabbed yet some more. So much arbitrariness can't be forgotten. Let's hope it's not them that have to administer the possible slap on the wrist that could now come from Europe!