Spain's Prime Minister Mariano Rajoy speaks to Budget Minister Cristóbal Montoro. (Efe)
Ángel Collado 07/04/2012 (06:00 AM CET)
Spain's complex political landscape, where power is shared between the national government, 17 autonomous regions, 50 provinces and over 8,000 local municipalities, has been criticized for the overlapping of public functions and its cost-inefficiency. The economic crisis has also partly been blamed on the public overspending on behalf of the regional and local authorities.
In order to come to terms with these duplications of public functions, the Spanish centre-right Popular party government of Prime Minister Mariano Rajoy is pushing forward an ambitious public administrations reform.
The reform is expected to be approved despite the opposition from the Socialist party, with whom the government is negotiating the details, given that PP holds absolute majority in the parliament.
The reform is also expected to open the path for privatizations of public services, as well as budget cuts in the public sector, including layoffs among public employees. The law is expected to be approved in August.
Opposition from the Socialist party
The Socialist party and its leader Alfredo Pérez Rubalcaba have already showed its discontent with the negotiations as it opposes to the privatizations of public services and the possibility of handing over financial and budgetary responsibilities of local administrations to the central government.
The only agreement that has been closed so far consists of allowing the provincial governments - an administrative layer between regions and municipalities -to take charge over public services in municipalities with less than 20,000 inhabitants.
The Spanish constitution from 1978 granted large amounts of autonomy to Spain's regions and municipalities, which created a political landscape where many public functions overlapped. The regional and local governments have been blamed for overspending during the years leading up to the crisis, for instance by the construction of cultural and sports complexes, regional airports and highways.
Apart from the negotiations between the two major parties, the government is also holding discussions with autonomous regions, the federation of municipalities and other political institutions with the aim of elaborating the new public administration act this month.
According to government sources, the Socialist party is not likely to give up its opposition against these measures only in order to close the agreement over the provinces. The government's aspiration is for this law to enter into effect by the end of this year.
Increased VAT will wait
Rajoy and Finance Minister Luis de Guindos have called for “additional efforts” or to ‘press the accelerator’ for the reforms, but it has ruled out an immediate increase of value-added taxes, an issue that has led to much speculations. It will be postponed until after the credit line from Europe to the Spanish banking sector has been approved.
The details about the financial aid to the Spanish banks, which Rajoy could not - or didn’t want to - explain after the European summit last Friday remain an open issue and until they are defined in the next Eurogroup meeting on June 9. Until then, Rajoy will not make his next move, at least not regarding the VAT.
Another measure that Rajoy's government is pushing forward is a new anti-fraud law expected to enter into effect in September. The government’s economic team, including ministries and the presidency, assures that the problem with the VAT collection is not so much the tax rates but the widely extended tax fraud.
In May, VAT collections dropped by 5.5 percent on average, by 6 percent for the major enterprises and 9.2 percent for small and medium enterprises.
Government sources recognize that these decreases must be stopped to comply with the deficit objective. The other two possibilities for tax collection has developed much better: the income taxes due to the increased rates in January and the corporate taxes after the government suspended tax privileges for big enterprises in the first quarter this year.
This article was translated and edited by Stina Lunden.
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