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Cablegate: Gos Explores New Regional Financing Proposal

This record is a partial extract of the original cable. The full text of the original cable is not available.

070930Z Jun 05

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.

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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

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