US embassy cable - 05MADRID2142

UNCLAS MADRID 002142 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP 
SUBJECT: GOS EXPLORES NEW REGIONAL FINANCING PROPOSAL 
 
REF: BARCELONA 86 
 
1. Summary. The GOS announced on June 3 that the Ministry of 
Economy and Finance is developing a new regional financing 
proposal that would cede more tax income to Spain's 
autonomous regions by 2007.  The final plan will be 
negotiated between the central government and the leaders of 
Spain's seventeen autonomous regions.  Minister of Economy 
and Finance Solbes has announced publicly that the government 
would consider transferring as much as 50 percent of income 
tax revenue to the regions, but has resisted making 
additional promises.  End Summary. 
 
Current Regional Financing 
 
2. Under Spain's current regional financing system, the 
autonomous regions receive a portion of certain taxes 
collected by the central government in their territory: 33 
percent of personal income taxes, 35 percent of the general 
value added tax and 40 percent of taxes collected on alcohol, 
tobacco and fuel.  The regions are able to levy and collect 
taxes including: estate, gambling, electricity and 
transportation taxes.  Corporate income taxes are controlled 
entirely by the central government.  Due to the difference in 
regional economic development and therefore tax revenue, the 
central government makes additional transfers through a 
Sufficiency Fund that helps poorer regions cover medical 
insurance and other costs.  Many regions, including the 
wealthier ones have large medical insurance debts.  Spain's 
regions have been recipients of EU structural funds for 
infrastructure since Spain entered the EU.  These funds will 
end for all but the very poorest regions in 2007. 
 
Regions Clamoring for More Funding 
 
3. The regions of Catalonia and the Balearic Island have 
developed regional financing plans that call for greater 
control over the taxes collected in their territories.  Both 
regions have demanded at least 50 percent of the personal 
income tax, increased transfers of the value added tax, and 
the ability to levy and collect their own corporate income 
taxes in their territories.  Other regions are concerned with 
the coming end of EU structural funds and the rising cost of 
medical budgets. 
 
The Central Government's New Funding Proposal 
 
4. According to public announcements and interviews with 
Minister of Economy and Finance Pedro Solbes, the GOS' new 
proposal will cede more tax revenue to the autonomous 
regions, but rejects most of the demands of Catalonia and the 
Balearic Islands. 
 
5. Solbes has suggested as much as 50 percent of the personal 
income taxes collected by the central government will be 
ceded to the autonomous communities.  The Ministry is still 
considering the formula to divide the income tax pool up, to 
balance the income between poorer and wealthier regions, and 
address the loss of EU structural funds.  Solbes has rejected 
transferring more value added tax to the regions and giving 
regional governments control over corporate income taxes. 
 
6. In a June 2 interview, Solbes said that the central 
government should give the regions more fiscal power and 
control over their finances.  However, he stressed that the 
decisions would be negotiated and enacted through 
negotiations with Madrid, not unilaterally by certain 
regions.  Solbes also noted that once the new financing plan 
is developed and enacted, the regions would need to be more 
responsible for their own financing and control recent 
deficit spending. 
 
7. Comment:  The GOS' new regional financing proposal is an 
effort to preempt the strident Catalonian and Balearic 
financing plans, as well as confront the drop in EU 
structural funds for the poorer regions.  The negotiations 
this Summer in the regional Presidents' meeting and next Fall 
in Parliament will be difficult for Zapatero's Socialist 
government which is dependent on regional parties to govern. 
Minister Solbes has made clear he will continue to be the 
guardian of fiscal restraint and economic orthodoxy in the 
coming debate.  The main weaknesses in the current proposals 
are how to maintain some level of funding equality between 
wealthy and poor regions and how to tackle the large health 
care deficits many regions have accumulated.  Both issues 
will require more than a simple 50 percent solution. 
 
MANZANARES