Potential Implications of Catalonia's Financing System Change

The State-Generalitat Bilateral Commission agreed on 'bases' for change to the Catalonia financing system. On a date yet to be determined, the Alternative Financing System for Catalonia would transfer tax collection responsibilities entirely from the National government (Kingdom of Spain, rated A (high), Stable trend) to the Catalan Tax Agency (ATC). In our view, Catalonia (rated BBB (high), Stable trend) likely benefits from the proposed change, as the additional revenues flowing directly to the ATC would support the regional government's fiscal position and its debt-reduction efforts. This assumes the regional government does not take advantage of the revenue windfall to expand expenditures. Though the agreement was shaped by bilateral talks between the central government and Catalonia, the application of the new financing system would be made available to all other Autonomous Communities in Spain, according to the commission. The upshot for central government finances is more unclear. The risk to the Spanish Treasury from managing less resources is that consolidated public finance outcomes are worse. To avoid fiscal slippage, we expect the central government to reinforce control mechanisms and more strictly align fiscal objectives between Spain and the regions. This document examines the benefits and challenges of the new financing system. We may learn more details after the summer, once all the regions gather to discuss the reform with the Ministry of Finance at the Fiscal and Financial Policy Council.

Key Highlights include:

-- Negotiations for a financing system change for Catalonia continued on a bilateral basis.
-- A potential change would likely increase regional revenues and help with regional fiscal repair.
-- Political and fiscal costs of this potential change for the national government might be higher than estimated.

Quote:

"The Financing System change could improve Catalonia's fiscal performance, but the central government would need to look out for the national fiscal deficit," said Jorge Espinosa, Assistant Vice President in the Global Sovereign Ratings Group. "The reform will be more specific over time, and it could still vary once other regions contribute to its development or express concerns."