TENSIONS SPARK OVER REVENUE SHARING FOR AUTONOMOUS

C O N F I D E N T I A L SECTION 01 OF 02 MADRID 000828 SIPDIS E.O. 12958: DECL: 07/23/2018 TAGS: SP PGOV PREL EFIN ECON SUBJECT: TENSIONS SPARK OVER REVENUE SHARING FOR AUTONOMOUS COMMUNITIES MADRID 00000828 001.2 OF 002 Classified By: DCM HUGO LLORENS FOR REASONS 1.4 (b) and (d) ¶1. (SBU) Summary. Efforts to revise an outdated revenue sharing model has sparked tensions between Spain's autonomous communities and are testing President Zapatero's loyalty to the Catalan Socialist party as it pushes for more financial autonomy and resources. The Catalan community government wants more access to and control over funds collected in its territories, but other communities which gain from centrally redistributed funds are opposed to this. Privately, Ministry of Public Administration officials have admitted to Econoffs that the old financing model is outdated and adversely affects those communities with recent population surges (such as Catalonia and Valencia). However, given counter pressures from other autonomous communities, which resent Catalonia's push for additional autonomy, it remains to be seen to what extent the central government will support Catalan aspirations. End Summary. -------------- AUTONOMOUS COMMUNITY FINANCING 101 -------------- ¶2. (C) As the government continues to gain consensus on a new autonomous community financial distribution model that would take effect with the 2009 budget, tensions continue over how to calculate the proportion that each autonomous community receives. Under the current financing model, the central government plays a dominant role in collecting and redistributing tax resources across autonomous communities. According to the Ministry of Public Administration's Deputy Director for Autonomous Community Analysis Felix Acitores, the amount of funding distributed by the central government often represents over 80 percent of the total amount of resources that an autonomous community receives. Furthermore, communities with lower GDP per capita such as Extremadura, Galicia, and Asturias benefit from the current model since they receive funds in higher proportion than more well off communities such as Madrid, the Balearic Islands, and Valencia. The autonomous community financial distribution model is slightly adjusted each year, but essentially overhauled every five years. ¶3. (U) Only Navarra and the Basque region are exempt from this redistribution system. Under Spain's constitution of 1978, these two autonomous communities are guaranteed the right to autonomous financing, and keep all tax revenues generated in their communities save for a "quota" amount which they pay to the central government for broader services (i.e. Defense, Foreign Affairs, etc.) -------------- WORKING TOWARDS A COMPROMISE -------------- ¶4. (U) In a move towards its own version of fiscal autonomy, Catalonia incorporated in its 2006 statute (or state constitution) authority to access and control tax streams from its territories which are currently being managed by the central government. In order to implement these financing provisions, Catalonia must first have the agreement of the central government. ¶5. (C) Deputy Director Acitores indicated to Econoffs on July 18 that the central government is not opposed to devolving some of these revenue streams. However, opposition from other communities that benefit from the current financing framework may serve to check Catalonia's aspirations. Given that Catalonia is one of the wealthier communities in Spain, others are fearful of losing out on a valuable and equalizing funding stream should Catalonia be given more autonomy over funds collected in its provinces. Furthermore, some believe that Catalonia's move for financial autonomy violates the principle of "inter-territorial solidarity." However, as confirmed by Acitores, in some ways Catalonia has suffered from an outdated national financing model which has not taken into account the population growth spurt Catalonia experienced through immigration. Infrastructure mishaps, particularly last fall's problems with the construction of the high speed train lines in Barcelona, have also exacerbated funding tensions. ¶6. (U) In the hopes of reaching a compromise consensus by August 9 (the date by which the Catalonia statute should ideally be implemented),Second Vice President and Minister of Economy Pedro Solbes recently proposed to increase the percentage of funding "refunded" to the communities. The central government distributes 35% of certain tax streams (VAT, income, and "special taxes") to the autonomous MADRID 00000828 002.2 OF 002 communities in proportions determined by the financing model. The central government keeps the remaining 65%. In its compromise proposal, the government would raise the distribution to 50%, which would in theory represent a net gain for all of the communities. ¶7. (U) The Catalonia government has indicated that they are not satisfied with Solbes' compromise, desiring more autonomy over its funds than Solbes' proposal would provide. In a July 20 speech given during a Catalan Socialist gathering, Generalitat (autonomous community government) President Jose Montilla responded to the government's financing proposal by saying, "We've heard the first notes of music and we don't like it." He added "Catalans love Zapatero, but they love Catalonia more", and in this he speaks for all Catalans. Talks to unify the Catalan position across party lines are ongoing with all sides in general agreement. Other autonomous communities are also hesitant to accept the Solbes compromise, which shifts the model's population funding somewhat. -------------- COMMENT -------------- ¶8. (SBU) Catalan demands have touched a raw nerve during a period of reduced economic growth, particularly given natural tensions between the central government and the hyper sensitive Catalan nationalists. Negotiations over the model will continue in the upcoming weeks, and will be incorporated into the budget to be presented in Parliament in late September. Whether and how Second Vice President Solbes is able to achieve a consensus for all the autonomous communities could impact on parliamentary dynamics on future issues at a time when the government does not have a working majority in the House. President Zapatero depends upon Catalan Socialist votes in parliament and would like votes from other Catalan parties, but he also needs the support of PSOE members who represent other autonomous communities. Aguirre