Our Fiscal Cliff

Two years ago the new government of Catalonia found itself facing a deficit for 2010 of 4.2% of Catalan GDP (in other words, 8,352 million euros) and the requirement of a deficit of 1.3% for 2011.

As a result, when drawing up our budget we imposed on ourselves an intense exercise of austerity, in many respects anticipating what would be done all over Spain. But since (then as now) we valued credibility, we did not commit to the official deficit target, setting instead a target of 2.6% of GDP. This was what we honestly believed that, applying utmost rigour and great discipline, we could hope to achieve.

At the start of 2013, the new government is faced with a similar dilemma. The target deficit for 2013 is 0.7% of GDP. But now, or to be more precise since August 2011, the crucial difference is that we cannot disregard the official target. Partly because the European control scenarios have hardened and, at the same time, become more refined. Our credibility will now largely be judged by our commitment and willingness to assume the targets recognised by Europe. And partly because the financial markets have closed down. We can only spend what we can finance, and we cannot finance more than the recognised target permits.

But this does not mean that we cannot voice our opinion on the target, or press for its revision if this is what is required. And this is precisely what is required: The 0.7% target for 2013 is intellectually weak, politically short-sighted and morally obtuse. Let me justify these three claims.

It is intellectually weak because, with Spain in recession and Europe not far behind, a fiscal deficit target for Spain of 4.5% of GDP, currently called for by Europe for 2013, has no logic in economic terms. It is overly restrictive and can only aggravate the Spanish recession, not something Europe now needs. In relative terms, the magnitude of the fiscal contraction that Spain will have to achieve in 2013 is similar to America’s “fiscal cliff”. 

The Americans have quite rightly been very concerned that their own actions might plunge them into recession. We should also be concerned, and for the same reason, with the added complication that we are already in recession. It is obvious that Europe must relax this target (and must do so in an orderly manner. In other words, without making credit more expensive, rather the reverse). This opinion is shared by many experts and international bodies. The Spanish government can be sure of our support if this is also its view. We trust that Europe will eventually come to the same conclusion, and that for its own good it does not give in to dogmatic impulses.

It is politically short-sighted, this time on the part of the Spanish central government, because it is unjust and arbitrary to impose a target of 0.7% on the autonomous communities when the overall target negotiated with Europe is 4.5%. 

This amounts to a show of raw power (and an illustration of the principle that “he who cuts the cake gets the biggest slice”), that does not help to establish a climate of trust and cooperation. We should not underestimate how much last July’s decision to harden the autonomous target, after Europe had relaxed it for the state as a whole, has contributed to precipitating the political conflict between the Spanish state and Catalonia.

How should the deficit target be distributed between the central administration and the autonomous communities? Bearing in mind that autonomous expenditure represents no less than a third of the total, a reasonable distribution would be 1/3 for the autonomies and 2/3 for the central administration, which would currently represent 1.5% and 3% respectively. At least this should be so if all autonomies had to set the same target, something that is not at all clear since their starting positions are different. In fact, a better solution would be for conditions to be uniform but in relation to the starting position, for example after deducting interest payments (and perhaps income from privatisations). 

The difference between ordinary expenditure (excluding interest payments) and ordinary income is known as “primary deficit” (or surplus), a central concept in fiscal consolidation policies. It makes more sense to impose a common target in relation to primary deficit than in relation to deficit: if interest payments per person are higher in one autonomous community than another, the result is a differential availability of resources per person for funding public services.

In any event, a deficit target for 2013 of 0.7% of GDP would imply a very large primary surplus (in 2013, payments for interest alone would be 2,200 million euros and 0.7% of GDP, some 1,400 million euros. 

The primary surplus would therefore be around 800 million euros). In a situation of recession like the present, to aim for this level of rigour would be foolhardy.

Finally, the 0.7% target is morally obtuse. What this represents (an adjustment of 4,000 M€ via income and expenditure) cannot be achieved either easily or painlessly. Any such adjustments that were possible (there were very few) have already been implemented. What is now being asked for will impose enormous suffering on our citizens. 

When suffering is justified by the need to recover health or get the economic train back on track (an image used by President Lula) there is no choice but to accept it, with discipline and hard work. But this 0.7% is not justified, will do no good and will probably leave us worse off than if we applied a rational fiscal consolidation programme. The difference between a target of 1.5% and one of 0.7% is 1,600 million euros – more, for example, than double the public contribution to our universities. In short, useless suffering, and quite enough to make one’s blood boil.

Andreu Mas Collell

Minister of Economy of Catalan Government