Government plans to cut regional deficit targets yet further

Despite being given more leeway to meet its deficit-reduction targets by Brussels earlier this week, the central government intends to turn the screws further on Spain’s already cash-strapped regions in their fiscal consolidation obligations.

The Popular Party administration now wants the regions to trim the shortfall in their books to 0.7 percent of GDP next year, compared with an initial target of 1.1 percent, and reduce it further to 0.1 percent in 2014. The 2012 target has been set at 1.5 percent.

But two PP-ruled regions, Castilla y León and Extremadura, refused to support the new deficit limits on Thursday, abstaining from the vote at the Council for Fiscal and Financial Policy, where the department of Finance Minister Cristóbal Montoro presented the proposals. PP-controlled Galicia was also expected to abstain, but ultimately voted in favor. Andalusia, Asturias, the Canary Islands and Catalonia all voted against the new limits.

The Eurogroup on Tuesday granted Spain another year to bring its deficit back within the three-percent-of-GDP ceiling imposed by the EU under its Stability and Growth Pact. It was initially due to meet that commitment next year. The target for this year was raised to 6.3 percent of GDP from 5.3 percent, while the goal for 2013 has been set at 4.5 percent, with the three-percent figure moved back until 2014.

In return, Prime Minister Mariano Rajoy on Wednesday announced austerity measures worth around 65 billion euros over the next two-and-a-half years to meet commitments taken on with Brussels.

Castilla y León and Extremadura refused to support the new deficit limits

The measures include a hike in the standard value-added tax rate to 21 percent from 18 percent and cuts to unemployment benefits and other welfare entitlements.

The Eurogroup also agreed to provide a bailout worth up to 100 billion euros to help Spanish banks whose balance sheets have been mauled by their exposure to the ailing real estate sector.

The Finance Ministry wants to keep the greater margin afforded by Brussels for this year to itself in order to meet pension payments and increased interest-rate obligations as a result of the spike in government bond yields.

Prior to Thursday’s meeting, a number of Spain’s 17 regions, including Andalusia, Catalonia, Asturias, Navarre and the Canary Islands, said they would also ask for greater flexibility in meeting this year’s deficit target.

The commissioner for economic affairs of Catalonia, Andreu Mas-Colell, said the region wants to be allowed to run a shortfall of two percent of GDP this year rather than the 1.5 percent.

When an effort needs to be made, it should be shared”

Mas-Colell said Catalonia will ask for compensation for the VAT hike, which will imply an additional cost for the regions when they pay their suppliers. “It will be an additional cost that won’t be offset by an increase in revenues,” the commissioner said.

José Antonio Griñán, the premier of Andalusia, which is Spain’s biggest region, said he would argue for an “equitable distribution” of the burden of meeting the deficit targets between the regions and the central government. “It is clear that when an effort needs to be made, it should be shared,” he said. He argued that 50 percent of the increased revenues from the VAT hike should go to the regions.

Mas-Colell said Catalonia supported the latest battery of austerity measures unveiled by Rajoy, but warned the VAT hike could depress consumer spending and put a damper on the vital tourist industry.

Friday’s session of the Council will measure the degree of execution of the financial stability plans presented by the regions to achieve the 18 billion euros in budget measures imposed on them for this year. These include 10 billion euros of cuts in spending in education and health.

The Finance Ministry is concerned that a number of regions have fallen behind in completing this task, a situation that will require them to impose more belt-tightening.

The regions were largely responsible for the blowout in Spain’s deficit target for last year of six percent of GDP. The actual figure came in at 8.9 percent as the shortfall in the regional finances doubled the target of a deficit of 1.3 percent.