Most of Spain's regions agree to deficit target

 

The Spanish government announced yesterday it had agreement from most of the country's 17 autonomous regions to comply with harsh cost-cutting measures this year, but three regions including heavyweight Catalonia said the burden was unfair.

However, given that the new objectives were approved by the cabinet last week, all regions will have to stick to the new targets whether they voted against the moves or not.

Treasury Minister Cristobal Montoro met with the financial heads of all of the regions to drive home a message of austerity needed to quell doubts about Spain's fiscal discipline as the euro zone debt crisis drags on.

At the meeting he won backing from all the regions controlled by the ruling PP for 10 billion euros of spending cuts that the regions must make and that will likely bite into health and education services.

But the highly populated southern region of Andalucia, controlled by the Socialist party before local elections at the end of the month, voted against the targets, Montoro said at a news conference after the meeting.

Catalonia, which makes up nearly a fifth of Spain's GDP, abstained from the vote as did the Canary Islands.

Catalonia pledged to comply with the target but said it believes it is disproportionate and that the central government should take on more of the deficit-cutting responsibility.

Montoro said the regions' commitment to deficit targets was key for Spain to move towards recovery. "We have to aspire to make this the last year of crisis," he said.

"The message we want to give is that all the public administrations are committed to cutting their deficit."

Prime Minister Mariano Rajoy defied the EU on Friday to soften Spain's deficit objective, but even his more realistic target will be beyond reach if regional leaders pose a similar challenge to his authority.

The regions account for close to half of all public spending - the biggest parts of their budgets go on health and education - and almost all of them greatly overshot their spending targets last year.

Spain's country risk, as measured by the spread between its borrowing cost and that of Germany, overtook Italy's this week as concerns have grown over whether the regions, with a combined deficit of 30 billion euros, can tighten belts.

Anti-austerity protests mounted last week as students anticipate deep cuts in education and healthcare.

Spain's deficit target for 2012 had been agreed with the EU at 4.4% of GDP. But that was when the economy was expected to expand by more than 2% this year.

It is now forecast to shrink by close to 2% and Madrid has also said that last year's deficit came in much higher than expected.

Rajoy said he would budget for a 5.8% public deficit, arguing that he was not breaking EU rules because Spain would still be on track to reduce its deficit to 3%, the goal, in 2013.

However, he did not pass on much wiggle room to the autonomous regions, softening their joint deficit target to 1.5% of GDP from the previous goal of 1.3%.

Montoro said all the regions backed the 35 billion euros in loans announced by the government to be able to meet an enormous backlog of unpaid bills to street cleaners, health workers and other public contractors.

Spain is a highly decentralized country with only 18% of public money spent by central government. Tensions between the centre and the regions has waxed and waned since the 1978 constitution gave them significant self-government powers during the transition to democracy after the Franco dictatorship.