Spain against Catalonia: the debt standoff goes on

The new Catalan administration has pledged a 10 per cent cut in 2011 budget. The Spanish government has reacted demanding a 20 per cent cut and reminding the Catalan counterpart they are free to rise local taxes in their region if money is short.

All Spanish regions have been asked to cut. Spanish government itself is under pressure from the EU, in the wider context of the trouble with the euro. Professor Keneth Rogoff of Harvard University, ex-chief economist at FMI, has added his voice to the growing chorus saying a rescue of the Spanish economy is very likely. He spoke before Portugal asked for help, which makes the Spanish rescue even more likely, as the next in the row.

In the light of all this, a central government forcing the regions to cut their budgets seems reasonable. In Spain there’s one central government to collect taxes and 17 regional governments to spend. It looks as if all what regions must do is open the hand and expect State funds. It seems as if regional politicians can get just praise from spending and blame Madrid if money runs short.

However, reality is far more complicated. Regionalisation in Spain has not only not got too far, as some suggest, but on the contrary, it has worked fairly well. Regions and cities pay much of the so called proximity services to the citizens, the day-to-day workings of the wellness state, with heavy and fixed costs, like the salaries of doctors, police and teachers. In spite of this, they owe just a quarter of the Spanish debt. So who owes the other three quarters?

Yes: that Central government, the same ignoring its huge room for cuts and savings. Spain is full of State-funded white elephants like empty airports, underused highways and high-speed trains. The network of embassies is vastly overstrecthed, far beyond the real worldly importance of the country. All this spending is ideological, supported by an underlying idea of Spanish nationalism and nation-building. It is also outright clientelism and special interests of certaing groups, as in the case of the irrealistically overpaid public officials abroad.

When this central government demands cuts to the regions, its authority will be differently perceived by those who fully depend on State handouts or by those who are net contributors and get less than give away. Catalonia has been historically among the latter. Estimates vary, but the difference between tax revenues collected there and what the central government returns is no less than a 9 per cent of  Catalan GDP, or 19 billion euro. To put this figures in context, contribution of richer German lander stands at a 4 percent, and the cap in the United Sates is set at a 2,5 per cent. Professor Rogoff described the Spanish case as specific, with strengths like top transnational corporations and regions like Catalonia, that could be one of the richest countries in the world. As a matter of fact, Catalan debt amounts roughly to two years of unreturned tax revenues from the central government.

The national conscience of the Catalans is turning this situation into a political conflict. In Catalonia, the sense of outrage is growing across all the ideological lines. The case is not one of a rich region revolting: regions are rich or poor, but also people, and so there is more poor people in the “rich” Catalonia tan people at all in “poor” regions. Neither it is a case of “taxation without representation“: a growing number of Catalans do not want representation at all, and are opting for outright independence. Catalan president Artur Mas has declared he is not afraid of a confrontation with the State.

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