Spain May Tweak Funding Formula to Fix Links With Catalonia

  • Spanish goverments seeks to reach an agreement by year-end
  • Government to name experts committee in cabinet meeting Friday

Mariano Rajoy

Photographer: Pierre-Philippe Marcou/AFP via Getty Images

Prime Minister Mariano Rajoy will explore making changes to the way Spain distributes about 94 billion euros ($101 billion) of tax revenue to regions in a gambit that could help mend relations with Catalonia.

The cabinet on Friday appointed a group of experts to make their report on regional funding within three months to help politicians broker a pact by the end of this year, said Cabinet spokesman Inigo Mendez de Vigo in a news conference Friday. While Catalonia won’t seek representation in the group, the expert named for the Balearic Islands will keep it abreast of developments, the region’s spokeswoman Neus Munte said last month.

After ruling with an absolute majority in his first term, Rajoy is adjusting to Spain’s changing politics after winning re-election in October at the head of a minority government. The need to court support from opposition Socialists and the liberals of Ciudadanos is forcing him to be more open in seeking solutions to challenges including increased separatist sentiment in Catalonia.

“I hope that the commission does a good job and the government makes an effort to explain it, also in Catalonia,” said Angel de la Fuente, managing director of economic think tank Fedea, who will be one of the five committee members representing the central government. “Probably those who have always been separatists won’t change their minds, but there are others that can be convinced.”

Rajoy’s time in office since 2011 has been marked by persistent clashes with Catalan separatists who argue their region gets a raw deal from the Spanish tax system to foment a widespread backlash against control from Madrid. Pro-independence parties won a majority in the regional assembly in 2015 and Catalan President Carles Puigdemont has vowed to hold a referendum on secession by September, in defiance of the Spanish courts.

While the regions are in charge of managing health and education services, more than 80 percent of their budget come from transfers from taxes collected by the central government.

Under the current tax-distribution system, wealthier regions such as Catalonia or Madrid end up with less money per capita than the average for the country as a whole.

The tax take per capita of Extremadura, a region close to the border with Portugal, is 35 percentage points lower than the Spanish average. Even so, public expenditure on the region per capita is 14 percentage points higher than the national average, according to Fedea. By contrast, the contribution of Catalonia to the tax system is seven points above the average, while it receives less than the average in return.

“Under the current system we have wealthy regions being ruled by relatively poor governments,” said Alain Cuenca, a professor at the University of Zaragoza, who will represent Aragon on the committee of experts. “There’s an understanding that a new system should avoid such distortions.”

Rajoy is starting the talks on the tax sharing system even as the revenue flowing into central coffers is set to be 20 billion euros less than the peak reached in 2007. The European Commission also wants Spain to cut its budget deficit to 3.1 percent of its output compared with 4.6 percent last year.

“Its necessary to improve the financing of the regions because that means improving the welfare state,” said Pedro Saura, a lawmaker for the Socialist party, which rules in seven regions including Andalusia and Extremadura. “Most of the budget adjustments applied in the recent years came at the expense of resources made available to the regions.”

The government has also created a separate group to consider changes to the funding system for city halls, the Budget Ministry said in an statement.

(Adds working group on city halls in last paragraph. Previous version corrected the spelling of Catalan spokeswoman’s name.)
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