US embassy cable - 04MADRID3715

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