SPANISH BUDGET NEGOTIATIONS: THE CATALAN POSITION

UNCLAS SECTION 01 OF 02 MADRID 003715

SIPDIS

TREASURY PASS TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: SPANISH BUDGET NEGOTIATIONS: THE CATALAN POSITION



1. Summary: Budget negotiations between the Catalan regional
government and the central government will be a key challenge
during the budgeting season which begins in earnest this
week. The three parties currently in the Catalan government
are unified in seeking increased funding for the regional
health plan, a long term increase in Catalonia's share of
regional government revenue and guarantees of increased
infrastructure investment from Madrid. The Catalan
government ultimately hopes to obtain a share of the regional
budget that more closely reflects its 16% share of the
Spanish population and 19% of Spain's GDP, than the roughly
15% it now receives. This money could come either from
ceding of more tax monies by the central government or direct
transfers from Madrid. The Catalan government believes it is
in a strong bargaining position because the Socialist
government in Madrid lacks a majority in Parliament and will
need the votes of Catalonia's regional parties to pass the
2005 budget by the end of the year. However, the delicate
balance between the competing demands of other regional
governments and the regional parties in Parliament will be
challenging. End Summary.


2. Looking ahead to the hard negotiations that will take
place between the central government and the autonomous
regional governments on their share of Spain's national
budget, visiting Madrid Econoff and ConGen Barcelona Pol/Econ
Specialist met September 20 with the Catalan regional
government's Secretary General of Economy and Finance Marti
Carnicer to discuss the Catalan position in the budget
debate. The Catalan regional government is one of the
regions making the strongest demands for more money from
Madrid. Carnicer told us that the three governing parties in
the Catalan regional government share the same overall goals
of covering the health program deficit, increasing the amount
of money received from Madrid, and increasing investment in
infrastructure. Carnicer provided a justification of why
Catalonia should receive a greater share of the national
budget and explained why the current political situation
provides the best opportunity for a budgetary reconfiguration
in Catalonia's favor.

CURRENT SYSTEM OF FINANCING
--------------


3. The current financing plan for 15 of the 17 autonomous
regional governments is known as the common system and was
negotiated in 2001 between the autonomous regional
governments and the then ruling Popular Party government.
The plan cedes a percentage of taxes collected by the central
government in each region to its regional government: 33% of
personal income tax, 35% of the value added tax and 40% of
the special taxes on alcohol, tobacco and hydrocarbons.
Autonomous governments receive 100% of the funds from taxes
on property and assets, inheritance, assignments, gambling,
vehicle registration and electricity levied within their
region. Regional governments also receive a direct transfer
called the Sufficiency Fund from the central government
budget to the regional governments to cover expenses not met
by the tax cessions.


4. Under this system, the Catalan government received 12.1
billion Euros (USD 14.8 billion) in revenue in 2002 (the last
year with complete budget figures). Tax income provided 84%
of Catalonia's revenue and Sufficiency Fund transfers
contributed the additional 16% of 2002 revenue. The average
regional budget is composed of 68% tax revenue and 32%
central government transfers. With this financing system,
the Catalan government is expected to have a 2003 deficit of
EUR 723 million (USD 887 million) once the accounts are fully
reconciled. Roughly EUR 600 million (USD 737 million) of
this deficit is from the public health service.

BUDGETARY GOALS OF THE CATALAN GOVERNMENT
--------------


5. Secretary General Carnicer described the broad goals that
the three parties in the Catalan government (Socialist Party
of Catalonia--PSC, the Republican Left of Catalonia*ERC and
the Initiative for a Green Catalonia--ICV) agree on in the
budget negotiation with Madrid. The most pressing issue is
obtaining immediate funding for the Catalan public health
program to alleviate its large deficit. In the medium term,
the goal is to achieve a revision in the budgetary process
that improves Catalonia's long-term revenue. One proposal is
to request a greater percentage of taxes collected in
Catalonia; the Catalan Counselor for Economy Castells has
publicly proposed raising from 35%-40% the amount of value
added tax transferred to the autonomous regions. Another
option is securing a long-term increase in central government
transfers through the Sufficiency Fund or special transfers
to cover health care expenses. Finally, all the parties
agree on the need for greater central government investment
in infrastructure projects in Catalonia, particularly the
completion of the high-speed train connection between Madrid
and Barcelona and improvements to the Barcelona airport.


6. When asked about how much money the Catalan government was
seeking, Carnicer pointed out that 16% of Spain's population
lives in Catalonia and that Catalonia produces 19% of Spain's
GDP. The three parties therefore expect to receive a
percentage of all autonomous government revenue somewhere
between those two numbers, rather than the current share of
about 15%. We also asked Carnicer about the perception that
PSC and ERC might have different goals, considering that the
ERC leader Carod-Rovira recently made a personal visit to
Madrid to meet with Spanish President Zapatero to push for
19%. Carnicer assured us that there were no key differences
between the three parties, though their negotiating tactics
might differ and some specific issues might be of greater
concern to one party than another. He mentioned that the PSC
is focusing on health and infrastructure, and that ERC would
like to see increased funding in Catalan language programs.
NOW IS THE TIME
--------------


7. Carnicer told us that the Catalan government is in a
strong negotiating position, and that the Catalan government
believes now is the opportune time to obtain additional
funding. He noted that the three-party government is a
strong one and willing to fight for its needs during budget
negotiations. Catalonia's budgetary goals are agreed on by a
large majority of the population and almost 85% of the
deputies in the Catalan parliament (the three governing
parties plus the former governing party Convergencia i
Union). The national government is a "gobierno amigo" or
friendly government. The tri-partite Socialist led coalition
was elected in November 2003 and the new Socialist led
government in Madrid was elected in March 2004. This is the
first time in 24 years of Spanish democracy in which both the
Catalan regional government and the national government have
been of the same party. Friendly atmospherics aside,
Carnicer also noted that the national government needed all
of the Catalan votes to pass the national budget, as Zapatero
governs without an absolute majority. Finally, Carnicer
pointed out that the autonomous regions of Catalonia and
Andalusia provided many of the votes that allowed the
Socialists to take power in Madrid. For all of these
reasons, the Catalan parties will push for and expect to
receive a change in regional finances that favors Catalonia.


8. Comment: The Catalan government is in a strong position to
make demands during the negotiations for the 2005 Spanish
Budget. President Zapatero's government does not have a
majority in Parliament and will need the Catalan votes to
pass his budget. As the first budget of Zapatero's
administration, it is likely that the national government
will compromise and work hard to pass a budget with a broad
range of support by regional parties. Catalonia is probably
the autonomous region with the strongest bargaining power due
to its size and the alignment of its Socialist-led government
with the national government. Catalonia is likely to gain a
significant increase in revenue from the budget negotiations.
However, the delicate task of balancing Catalonia's increase
with demands of other regions in a budgeting environment of
high aspirations but fiscal limits will be a major challenge
for Zapatero's budget negotiators.
MANZANARES