Impact of the economic crisis on Catalan government finances

Abstract

The purpose of this article is to analyse the impact that the economic crisis, which began in 2007, and the fiscal consolidation policies subsequently adopted have had on the finances of the Catalan government (Generalitat of Catalonia). The crisis seriously affected the Generalitat's tax revenues, mainly the Property Transfer Tax linked to the real estate sector. The fiscal consolidation policies applied on the revenue side have been determined by the taxing power of the Generalitat, which has no regulatory power over major taxes, except Personal Income Tax (IRPF), and very limited powers with regard to tax administration, which means the Generalitat's finances are subject to the advance payment system. Consequently, there has been a significant reduction in Catalan government expenditure, which has hit the welfare state services (health and education). Financial expenditure, on the other hand, increased considerably by generating deficit and debt. It may therefore be concluded that spending cuts on basic services have not only been caused by the crisis but also by the shortcomings of the regional financing model and the deficit targets set by the central government, lower than what would correspond to the Generalitat's responsibilities.