More money for Catalonia, but without ordinality: this is how the financing talks stand.

Barcelona / MadridWith the Andalusian elections looming in the first half of next year, Spain's First Vice President and Minister of Finance, María Jesús Montero, has stepped up the pace with the new financing system for the autonomous communities under the common regime. Negotiations between the PSOE, PSC, and ERC are in the final stretch, but there are currently obstacles preventing an agreement: although Montero's proposal ensures more money for Catalonia, there is disagreement over the model, as it currently does not structurally guarantee the principle of ordinality, much less the collection of personal income tax by the Generalitat.

Let's get down to business. The negotiations have been structured into three sections. The first is the financing model, that is, how resources are distributed among all the autonomous communities; the second is a package to increase the regulatory capacity of the autonomous communities and limit tax dumping in Madrid; and the third is the delegation of state tax collection, starting with personal income tax. According to sources familiar with the negotiations, the document on the financing model affecting the autonomous regions is the most advanced, while the final document is the most in progress, to the point that the ERC has presented a bill in Congress to require Catalonia to collect personal income tax. "There is a disagreement," Secretary of State for the Treasury, Jesús Gascón, made clear on Friday. "We are very far away," Oriol Junqueras also stated. "Work is underway, we are not far away, but there are still a few days of negotiations left," added sources from the Catalan government, who say their priority is to ensure the financing of public services.

The pillars of the new common regime model

Gascón is leading the negotiations for the ministry, while the Catalan side is represented by the Minister of Economy, Alícia Romero, with her deputy, Juli Fernández, and, for the Esquerra party, Lluís Salvadó and Marta Espasa. The Catalan government also includes the Minister of the Presidency, Albert Dalmau, in addition to the technical support of economist Martí Carnicer. In other words, the meetings are three-way (Treasury, the Generalitat party, and ERC), and the ERC and PSC also meet to try to negotiate on equal terms. When the highest level is required, Montero appears, while Junqueras and the president, Salvador Illa, validate all the papers exchanged. In the last few hours, the Catalan side was preparing a final proposal to send to the ministry, which Isla and Junqueras would have to endorse in a meeting, according to knowledgeable sources.

For now, there has been an approximation of the net gains that Catalonia should have with the new model: if the negotiations began with 3.5 billion euros, according to sources, they have now exceeded 4 billion euros. The figure "is very close" to what ERC is proposing, spokesperson Isaac Albert said this week. In any case, no autonomous community would lose resources, but some should benefit more than others.

According to the models the negotiators are working on, Catalonia would gain in net resources, while Andalusia, as occurred with the FLA debt forgiveness, would benefit the most in absolute terms. The Community of Madrid, on the other hand, despite also obtaining more resources, would gain less than average.

How would this result be achieved? According to the sources consulted, they are negotiating to increase the tax base of the autonomous communities in the financing system, that is, the regional percentage of tax collection: if it is currently 50% for VAT and personal income tax and 58% for excise taxes, these percentages would be increased and the VAT for SMEs would also be included, which would benefit Catalonia. This transfer of resources would not be made through advance payments—which currently entails a delay in collection—but rather by transferring the resources instantly, as Gascón acknowledged on Friday. At the same time, there would be an additional injection of funds from the State—at least 18 billion euros–. This would be achieved through vertical leveling and would allow for the correction of the imbalance that has occurred since 2014 due to the increase in revenue obtained by the State thanks to the increase in tax collection, unlike what was earned by the autonomous regions.

Separately, negotiations are also underway on how to guarantee the financing of non-homogeneous powers, which in the case of Catalonia are the Mossos d'Esquadra (Catalan police), prisons, the protection of Catalan, among others. Agreements are now being made outside the financing model, which the Catalan side wants to be structural to secure resources.

The discrepancies

Despite this increase in resources, one of the biggest discrepancies in the new model is the calculation of the adjusted population, which is key when determining the resources of the regions. The Catalan side disagrees with the amount attributed to Catalonia, since it is less than the actual amount due to the higher population density.

The other most important disagreement is with the principle of ordinality. All parties have assumed that it cannot be introduced as a fixed variable in the model, but the ERC and the Generalitat (Catalan Left) do argue that the final result of the distribution of funds must respect this principle. Or at least come close. That is, if Catalonia is the third largest contributor to the common fund, it should be roughly equal in the ranking when it comes to receiving. This does not currently occur with the ministry's approach, according to the sources consulted, if the calculation is based on the actual population. Yes, if calculated based on the adjusted population, because the population is reduced and it is met thanks to this, not to an increase in resources.

With the current financing model, Catalonia is in third place when it comes to contributions, but falls to ninth or tenth in receiving resources from the system. In the case of the Republicans, they don't want what happened in 2009 to happen to them, when they obtained an additional €3.8 billion for the Generalitat, but it was only met at the beginning: with the economic crisis, revenue plummeted. They want, they say, something structural.

The problem is that for the Treasury, this is not a priority. "Political balance," they say, is needed, and not just to please ERC. In his opinion, the stumbling block of the new system is the agreement of the bilateral commission between the Generalitat and the State, which did not guarantee ordinality, and not the ERC-PSC pact to invest Isla, which did.

Fiscal and Financial Policy Council

With negotiations underway, Montero has already announced that she will convene the Fiscal and Financial Policy Council, and according to several sources, it could be held in the first week of November. There, she wants to approve the spending ceiling and the stability path, as a first step towards the State budget, and she also wants to put forward a "complex" proposal for the financing model. She fears that, even if it's not on the agenda, the PP's autonomous regions are opening a Pandora's box.

"The point is to be prepared," say sources close to Montero, whether or not there is a firm agreement with the ERC. The Republicans, in this regard, urge her to exercise caution, since if she delves into the substance of the matter without reaching an agreement with the Catalan side, they will be forced to amend her entire announcement and rely entirely on the parliamentary process that should take place in Congress in the following months.