Fiscal Pact Meeting in Madrid between Rajoy and Mas

September 20th 2012

It is worth going back and looking at the idea behind the fiscal pact and Catalonia's tax deficit. It had been one of the central points behind the drafting of the new Catalan Statute of Autonomy between 2003 and 2006 and is a long-standing Catalan complaint. In fact, the idea of Castile overtaxing Catalonia in order to invest in its own projects goes back at least to the Union of Arms of 1626, in which Count-Duke Olivares imposed quotas on the Principality in order to finance the Castilian army during the Thirty Years War.

The problem continued with the imposition of the cadastre tax on the old Crown of Aragon, but not on the Crown of Castile, after Catalonia was annexed by Felipe V in 1714 and there were continual complaints of overtaxation throughout the 19th century when Catalonia became an industrialised economy whilst the rest of Spain remained agricultural. Under Franco, Catalonia was once again Spain's economic motor but, being populated by what the regime called red-separatists, the region saw few benefits.

In the transition to democracy after Franco's death, it was hoped that Catalonia would gain a more equitable tax status but in a process that became known as café para todos or coffee for everybody, its claims were neatly sidestepped. Interestingly, this didn't happen to the Basque Country and Navarre, who as they had received special treatment under the dictatorship were able to negotiate similar advantages under the new democratic regime.

The system known as the economic concert allowed the Autonomous Governments of the Basque Country and Navarre to collect their own taxes and then pay central government for services such as defence, foreign policy and the monarchy as well as a quota to the interterritorial solidarity fund, which gives aid to Spain's poorer regions.

For a number of reasons, Catalonia wasn't able to negotiate these conditions when its original Statute of Autonomy was drafted in 1979, which means that central government collects taxes and then returns money to the Generalitat for health, education and social services amongst other things and invests in roads, railways, airports and other infrastructures through the appropriate ministry. This would be fine if the criteria used to redistribute finances followed any kind of logic. Unfortunately, in Spain they don't.





Catalonia isn't the only Autonomous Community to be unfairly treated but rough calculations estimate that whilst Catalonia is home to 16% of the Spanish population and generates 19% of its GDP and 25% of its exports, it only receives 11% of resources invested by central government. Studies by Catalan academics suggest that for the last 30 years, Catalonia has suffered a tax deficit, which is the difference between what it pays to central government and what it gets back, of around 8% of its GDP. In 2013, the Generalitat calculated that the tax deficit stood at €16 billion making Catalonia one of the most heavily taxed regions in Spain.

This would be understandable if the Spanish finance system were equitable. However, per capita, Catalans are the third of the seventeen autonomous communities in the ranking of tax payment but fifteenth in terms of investment. This is why Catalonia is the part of Spain where there are most privately financed toll motorways and where unlike some other regions, Catalan parents have to pay for their children's school books.

In the financial section of the new Catalan Statute of Autonomy, which was approved by referendum in Catalonia in 2006, one of the clauses specified that Catalonia's position in the ranking of tax payers had to be equal to its position in investment. Basically, it stated that Catalans couldn't be made poorer in comparison with other regions as a result of central government tax policy. However, in its ruling of 2010, the Spanish Constitutional Court, whilst not considering the article unconstitutional, ruled that it was not legally binding so central government could carry on as it always had done.

Not surprisingly, in the elections to the Parliament of Catalonia in November 2010, just over 4 months after the Constitutional Court ruling, Artur Mas and CiU centred their campaign around solving Catalonia's tax deficit. Rather than calling this the economic concert, to distinguish it from the Basque Country and Navarre, it was called the fiscal pact but effectively it amounted to the same thing. Catalonia would be responsible for collecting its own taxes and would need to create a Catalan Treasury in order to do so.

Once invested as President of the Generalitat, Artur Mas set up a parliamentary commission to look into the problem, which concluded that the historic fiscal deficit "has weakened the economic competiveness and welfare in Catalonia". It also pointed out that the current model didn't give "full satisfaction to Catalonia's financial needs within the common system".

The text also emphasised that "if Catalonia already had a fiscal pact, the Generalitat wouldn't have to make cuts or if so very much smaller ones". The Generalitat already knew that it would be obliged to reduce the public deficit by 2.9% in 2011 and 2012 in order to achieve the objective of 1.3% set by the state, a percentage that was obviously well below Catalonia's structural fiscal deficit of 8%.

The proposal made it clear that the new financing system would be "based on the economic concert", which would mean abandoning the common system in favour of a bilateral relationship between the Generalitat and the State. The text made continual references to the Basque and Navarran systems, even though the Catalan government preferred the term fiscal pact rather than economic concert. However, there was very little difference between the two systems in practical terms.

The commission also emphasised that it would not be necessary to modify the Constitution or the Estatut to achieve this. Reforming the Ley Orgánica de Financiación de las Comunidades Autonómicas (LOFCA) and including an exception to the common system, similar to the Basque Country and Navarre, would be sufficient.

This reform would have to be accompanied by a new law to regulate the details of the new Catalan model. Starting from the basis of the Basque law, this would include a fiscal chapter regulating the secession of all taxes paid in Catalonia to the Generalitat and the creation of an Agència Tributària Catalana or Catalan Treasury to collect, manage and pay all taxes and also to fulfil inspection functions. Furthermore, Catalan Parliament would have the capacity to make taxation laws in Catalonia.

In effect, they were proposing total tax autonomy for Catalonia and Artur Mas would later use the expression fiscal sovereignty to refer to this. The commission also proposed a system of bilateral coordination in order to establish the mechanisms to guide the negotiation between the Generalitat and the State as well as periodical reviews of the tax model.

A financial chapter would fix how much Catalonia would have to pay in return for services provided by the State and its contributions to so-called interterritorial solidarity. Catalonia's solidarity quota would be "similar" to the Basque and Navarran agreements "in terms of resources per inhabitant" but shouldn't mean that Catalonia lose positions in the ranking of communities in income per capita as a result. The fiscal deficit should never exceed that of other EU regions with characteristics and GDP similar to Catalonia. Furthermore, the Generalitat wants to insure that the solidarity quota is destined to ends which "insures the development of the territories that receive the aid".

The commission's conclusions were debated in the Catalan Parliament in July 2012 and were passed by a clear majority with votes in favour from CiU, ERC and ICV. PSC, PP and C's all voted against but the socialists and the Partido Popular said they would be willing to negotiate in the future. However, during the electoral campaign to the Spanish Parliament in November 2011, the then aspiring Partido Popular candidate to the presidency, Mariano Rajoy repeated various times that he didn't know what the fiscal pact was and had no knowledge of its content. On a number of occasions, he referred to it as "literature".

Whilst fully aware that Artur Mas was unlikely to receive an affirmative answer from Rajoy, expectations were high on the evening before their meeting in Madrid on September 20th, just nine days after the historic Diada demonstration. The press was there to photograph his departure on the high-speed AVE train from Lleida. Everyone knew that a positive response from the Spanish President would quickly reduce tensions and recreate an atmosphere of collaboraton between the Generalitat and central government.

The headline in the newspaper the following day read "New Era. Rajoy gives a categorical 'No' to the fiscal pact because it's not consistent with the constitution". Artur Mas said that "A historic opportunity for understanding had been lost" and that he was "sad and disappointed" that after two hours Rajoy had left Catalonia without a shred of hope on the fiscal pact. "Catalonia cannot give up on its future" nor "remain subjugated" so "all possibilities are open".

A few hours later thousands of Catalans welcomed Artur Mas in Plaça de Sant Jaume as if he had returned home victorious from a battle. Cries of "Independence" and "Mas, be valiant! Catalonia, independent!" Leaders of the civil organisations Institut d'Estudis Catalans, Òmnium Cultural and Assemblea Nacional Catalana were present, and President came down the square, where he received an avalanche of congratulations for the courage with which he had defended his position. Mas did little more than wave and shake hands and at one point he sang along with the Catalan anthem Els Segadors.

"Today we still have nothing to celebrate," he said, fully aware of the difficult road ahead."



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