Spain turns to regions to promote austerity drive

The European Union has urged the euro zone's fourth-largest economy to make further budget cuts locally as well as nationally to help shrink its deficit from 11.2 percent of gross domestic product last year to 3 percent by 2013.

Spain's minority Socialist government has to enforce budget cuts at the local level, where debt has increased sharply due to reduced tax revenues amid a recession, while fostering parliamentary support from the regional parties.

The Socialists won approval for their 2010 budget with support from the centre-right Basque nationalists (PNV) in exchange for further tax autonomy for the northern Basque Country region.

The government will likely have to offer further concessions to regional parties if it wants to win the seven votes it needs in parliament for an absolute majority to pass a draft budget by the end of September, followed by final passage by December 30.

Spain has banned local councils from issuing long-term debt in 2011 as part of a 15 billion euro austerity bill passed in May after the country came under international pressure to avoid a Greek-style debt crisis.

However, it did not extend the ban to Spain's 17 regional governments, responsible for running schools as well as health and social services.

Regional government and council deficits accounted for 2.5 percentage points of the 2009 deficit of 11.2 percent of GDP.

The regions account for around 58 percent of total government spending, and their debt is on a sharp upward trend as they try to fund spending with reduced tax takings due to a 20 percent jobless rate - the highest in the euro zone.

Regional government debt rose 28 percent in the first quarter from a year earlier to a record 94.6 billion euros, while local council debt has climbed almost 16 percent to 36 billion euros in the same period, according to Bank of Spain data.

Credit rating agency Standard & Poor's has warned that the regions must implement major cost cuts.

Regional governments' desire to continue with ambitious capital-spending programmes coupled with lower tax receipts will lead to the worst consolidated budgetary performance in recent history in 2010, it said in a recent note.

Councils are already struggling to pay salaries. The mayor of Cenicientos, a town in Madrid province, told ABC newspaper this month the town had not been able to pay June pay cheques.