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Economic recovery: More resources for the Generalitat?

The indicators regarding the Spanish economy are promising, as they show a positive trend. In 2014, GDP grew by 1.4% and analysts predict growth of 2.5% for 2015. This increase has been accompanied by that of employment, with a growth rate of 2.5%. Where it has been most effective is in the industrial sector, where employment has grown twice as fast as the average of the job market. The positive performance of the corporate sector can be seen in increases in production, investments in equipment assets, which grew for the first time since before the crisis, and in revenues.

Moreover, there are also signs of improvement in domestic demand. Household consumption grew during the last quarter of 2014 by 3.3% and investment in the construction sector grew by 2.4%, accompanied by an increase in automobile purchases and cement consumption, respectively.

In Catalonia the data are also positive. In 2014, GDP grew by 1.5% and domestic demand by 2.6%, after five years of continuous descents.

The Spanish government is boasting about this economic recovery and attributing it to its policies and structural reforms. You must not forget, however, two issues. The first is that the Spanish government is lucky, because there are a number of external factors that are contributing positively to the recovery: the fall in oil prices and prices in general, low interest rates due to the actions of the European Central Bank (ECB) and the collapse of the euro, which also favors the policies of the ECB. The second is that alongside these signs of economic recovery, the Spanish economy still has worrisome factors: high public and private debt, which continues to grow (and it seems that the increase in private consumption is due to access to credit), low competitiveness and productivity, and high unemployment.

With all this, it is expected that this year the economic recovery will provide an increase in tax revenue and help reduce the deficit. Thus, improvements in production and employment will increase corporate profits and household incomes, leading to increased corporate and individual income tax receipts. Meanwhile, growth in consumption will result in higher revenues for VAT and excise taxes.

However, this increase in tax revenues will immediately benefit only the Treasury of the central government. Thus, although the Generalitat of Catalonia receives 50% of the tax on income and VAT, and 58% of excise taxes, increases in tax revenues from these figures will not benefit regional coffers in 2015, which will have to wait two years. This is important if you consider that the income taxes mentioned represent almost 50% of the resources of the administration of the Generalitat.

All of this is the consequence of the existing centralized system of tax collection for these taxes, and of how revenues are passed along to the regional governments. These taxes are administered by the State Agency of Tax Administration, and do not go through the Catalan Tax Agency, which only collects lower quantity taxes such as the tax on property transfers or taxes on inheritance and donations. The State passes along the resources from the major taxes mentioned by means of advance payments based their own forecast of tax receipts. If tax revenues increase more than the State´s forecast the advance payments are not modified. This is what it appears will happen this year, as happened in part of 2014. The Generalitat can only take advantage of the growth in tax revenue two years from now, when the corresponding budget year is finalized. However, if they had their own Tax Agency this would not happen, as the Generalitat would administer these taxes and could take immediate advantage of their positive evolution.

In addition, the higher tax revenue that the central government is enjoying will help them to comply with the public deficit target established for this year, which is 3.5% of GDP. This should justify a relaxation in what they have established for the autonomic regions, which is only 0.7% of GDP. However, this is not likely to happen, given the regional policies of the central government, increasingly oriented towards recentralization and contemptuous of the regional governments.

With these conditions and the poor system of regional financing it is impossible to meet the public deficit targets established by the central government for the regions, in spite of what Minister Montoro may say. In 2014 the Generalitat closed with a deficit of 2.58% of GDP, according to the Spanish government, when the goal was 1.1%. For 2015, the target will be even more difficult to reach, as it is set at 0.7%.

The solution will not be found in a reform of the regional financing system. I´ve explained why in previous articles. For this reason, I have no hope for the regional reform promised by the central government for after the municipal elections. The only solution for Catalonia is to have its own Tax Agency, and the best way to achieve that is to be an independent state.