We will have to make bread out of stones

There is a Catalan saying: “Catalans make bread out of stones”. The team that manages the Catalan government’s finances, led by vice president and Finance Minister Oriol Junqueras, will need to be true to that old saying, for no other reason than many needs must be met with very scarce resources and under very unfavourable conditions.

At the start of the pre-independence period, Catalonia’s coffers are in a very precarious state. The reasons for that are widely known: Catalonia’s finance system is bad, insufficient and has expired. Catalonia is being subjected to an unfair, unattainable public deficit cap and its finances were effectively taken over by the Spanish authorities back in November, when provisions were brought in whereby the Catalan government is only allowed to spend the funds transferred by Madrid via the Regional Liquidity Fund (FLA in Spanish) on those items which the Spanish government has approved beforehand.

The regional finance model that was first rolled out in 2009 is a failure. Catalonia’s Finance ministry recently drafted a report analysing the evolution of the model from 2009 to 2013, the last year for which we have the full accounts. As you read it, you soon realise that its defects are akin to those of the previous system but, to make matters worse, it is more complex. You only need to examine some figures in order to prove it.

With regard to the total funds which the current finance system has yielded, it must be noted that Catalonia’s income is still below the regional average in Spain (excluding Navarre and the Basque Country, who are entitled to collect and manage all their tax revenues). In 2008, the year before the current system came into effect, Catalonia’s income per capita was 4 per cent lower than average. In 2013, with the new system, it was still 2.5 per cent below par, as opposed to certain regions whose income per capita is up to 32 per cent higher than the regional average. Besides, if we adjust each region’s funding to its own individual cost of living, then Catalonia’s income is 16 per cent below average.

Additionally, between 2010 and 2013, Spain’s disposable income grew by 8.3 per cent yearly, whereas the regions’ fell by 3 per cent. Obviously, this has had an impact on the regional governments’ spending on the main services they provide (for instance, welfare). Thus, regional spending on healthcare and education has shrunk more than in the EU countries due to the recession.

Another factor that has led to cuts in spending is the public deficit caps imposed by Spain’s central government on the country’s regions. Madrid’s method of dividing up per government level the deficit target set by the EU is totally unfair. In 2016 the EU set an overall deficit target for the entire public sector in Spain of 2.8 per cent of the Spanish GDP but Madrid divided it up in such a way that the central government is allotted 2.5 per cent, while the regions only get 0.3 per cent. Local governments are not allowed any deficit at all. Therefore, the State hoards 89 per cent of the total deficit allowed, leaving only 11 per cent to the regional governments, whose total spending amounts to a third of all public spending in Spain. If their actual weight were to be taken into consideration, their deficit target should hover around 1 per cent of the GDP, at the very least.

What can we do when faced with a situation like this, when we have an urgent social action plan to implement and statehood structures that need to be built? We cannot place much trust on the reform of the current regional funding system promised by the Spanish parties for this new term. Firstly, because even if they expedite it, it is unlikely to be rolled out before 2017 and, secondly, because after having seen many previous reforms, I remain skeptical as to whether a new one would benefit Catalonia at all. Initially we may receive some additional funding, a modest handout, but it would not solve the underlying problem.
Likewise, creating new taxes does not seem viable either, as every time the Catalan government establishes a new one, it is appealed against by Madrid. Nor can we rely on selling assets, which has been done extensively in the past. Still, there is a silver lining in the fact that more tax money might be raised as a result of the economic recovery. Despite all these woes, it must be said that we would be better off if we had a new budget for 2016 rather than extending last year’s.

All in all, we will need to continue relying on Spain’s FLA to finance our public deficit, which will obviously be over the target set by the Spanish State but moderately so, as we must not forget that the law of budgetary stability established certain coercive measures in the event of failing to meet the goals set, such as Madrid taking over a region’s devolved powers on taxation.

I believe that the Catalan government must be astute and imaginative. Astute so as not to offer the State any grounds to strike down Catalonia’s decisions, primarily with regards to the creation of statehood structures. And imaginative to find new sources of income and ways of managing public affairs that save cash. Finally, we must wish them good luck and wisdom to make the right decisions.