Rajoy tells regions no way out of cutbacks as government prepares budget

Economy minister adds 8.4 billion euros to shortfall due to recession

Prime Minister Mariano Rajoy on Monday ruled out the idea of affording the country’s regions some leeway on their contribution to reducing the shortfall in the state’s finances.

At the same time, Economy Minister Luis de Guindos on Monday estimated the government would have to find budget savings of 37.9 billion euros this year to meet the deficit figure of 5.8 percent of GDP. De Guindos insisted that the higher-than-agreed overshoot complied with the terms of the European stability pact.

The regions, which were largely responsible for the blowout in the country’s finances last year, will have to contribute 15.6 billion euros to the total estimated by De Guindos. The country’s two biggest regions, Andalusia and Catalonia, on Sunday called on Rajoy for some slack in the target in order not to have to cut back on essential services such as health and education.

However, after a meeting Monday with the OECD’s secretary general, Ángel Gurría, Rajoy said the regions would have to make a “significant effort,” adding that the central government had no intention of relaxing the target set for the regions of a deficit of 1.5 percent of GDP. That figure, he pointed out, was up from 1.3 percent last year when the actual shortfall was 2.94 percent.

News agency Efe quoted Finance Minister Cristóbal Montoro as saying that it was not in the interest of any region to ask for flexibility in the deficit target as this would serve “scant favor to their reputation with the markets and investors.”

Representatives of the central government and the regions are due on Tuesday to show their faces at a meeting of the Council for Fiscal and Financial Policy meeting.

In structural terms, we are going to compensate for the adjustment that should have been made last year

The stability and growth program previously agreed with the European Commission calls for Spain to cut its deficit by 4.4 percent of GDP this year. However, De Guindos argued that with the economy set to shrink by 1.7 percent this year, and with the 2011 deficit coming in at 2.5 percentage points above target at 8.5 percent, the 4.4-percent figure would not be feasible.

Speaking at a financial seminar, De Guindos said the impact of the recession on the budget in terms of lower revenues and higher spending on unemployment benefits would be 8.4 billion euros. The government expects the jobless rate to reach 24.3 percent this year.

De Guindos said that as called for in the stability program agreed with Brussels, Spain will cut its so-called structural deficit to 3.5 percent of GDP this year. The structural deficit is the shortfall in a country’s finances that is not explained by cyclical factors such as booms and downturns.

He said that the structural deficit last year was 7.0 percent instead of 4.7 percent as targeted, with the other 1.5 points in the shortfall due to cyclical factors. The cyclical deficit forecast for this year is 2.3 points instead of the 0.9 points agreed with Brussels at a time when the Spanish economy was expected to grow.

“In structural terms, we are going to compensate for the adjustment that should have been made last year, and the one we are committed to for this year,” De Guindos said.

The minister insisted that bringing the structural deficit down to 3.5 percent this year and complying with the target agreed with Brussels for a deficit in 2013 of three percent of GDP is “in line with the spirit and letter of the stability program.”

“If the divergence had not taken place in 2011, everything would have been a lot easier,” he said. “We would have had strict compliance with the deficit target, and fiscal consolidation would have been a lot easier.”

Rajoy insisted he did not have to get Brussels’ permission to announce a deficit higher than that agreed with the previous Socialist administration. “We have done what seems to us to be logical and reasonable, and we will be evaluated in April when we will speak with the Commission,” he said.

Rajoy’s announcement on Friday of a higher deficit target than agreed with Brussels took European leaders aback. But the Spanish administration received words of support on Monday from European Commission President José Manuel Durão Barroso, who said he had no doubts” that Spain would comply with the terms of the Stability and Growth Pact.

Gurría also backed Spain’s decision to opt for another a higher deficit this year. “Spain has not given up on anything,” the OECD chief said. “It has ratified its commitment to fiscal stability, it hasn’t changed the destination point of a deficit of three percent in 2013.” Gurría said that how Spain arrived at that point was a “technical issue; a matter of details.”

The OECD chief also had words of praise for the financial sector and labor market reforms introduced by the Rajoy administration. “We appreciate and value enormously the reforms that have been undertaken in the labor market, as regards the budget and the reform of the financial sector.”

However, Amadeu Altafaj, a spokesman for the European economic affairs commissioner, said that once Brussels had studied Spain’s budget plans for this year, it would decide whether or not to make recommendations under Article 126 of the EU Treaty.

Article 126 deals with sanctions imposed on countries with excess deficits, which could entail a fine of 0.2 percent of GDP if effective action is not taken to correct any overshoot.

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