Rebellion in the making

The government should not underestimate the political and economic consequences of the rejection, by several regional governments, of the demands for compliance with deficit-reduction objectives imposed by the Finance Ministry. Extremadura and Castilla y León, both governed by the Popular Party (PP), declined to vote in favor of the deficit limit required by the minister Cristóbal Montoro for 2013 (0.7 percent of GDP), with four others voting against it.

And this nascent rebellion should not be underestimated, because it is obvious that all the regional governments, even those that voted for Montoro’s proposal, consider that this limit should be flexibilized in line with the more relaxed demands of Brussels on the national deficit (a year more for reduction to three percent of GDP), and that they should share in the greater income deriving from the VAT hike. The finance minister has already announced that the surplus income over the forecasts for 2012 will go entirely to the central government.

It appears that in the regional government ambit the government is mistaken in its approach to fiscal and financial relations. It is a mistake to impose rigid limits on all the regional governments, without having previously defined the health and education expenditures to be shouldered by each of them, their adjustment needs, and their capacity to comply with them. All this, for the simple reason that, due to a defect in the system’s structure, the regional governments depend almost exclusively on shareouts from taxes negotiated with the central government. So that, faced with drastic adjustments in deficit, and a no less drastic slump in income, the regional finance heads are trapped in a corner.

The imposition of uniform adjustment norms is absurd. And just as it is absurd to demand of Spain that it pass from a deficit of 8.5 percent of GDP to three percent in three years, it is also unreasonable to demand a 0.7-percent deficit objective for 2013 of regional governments lacking in economic activities other than those driven by public money. Financially choked, the regions will have to call for help, but the conditions set in the decree that regulates the creation of the Regional Liquidity Fund, published in the official gazette on Saturday, leave them no capacity for decision or room for maneuver.

The government again errs in trying to reproduce, in the mechanisms for aid to financially strapped regions, the hard demands that Brussels has imposed on bailed-out euro-zone nations. The government’s decree even toughens the demands for control, granting itself an exaggerated power of intervention. It is all very well to attempt to curb the excesses of regional spending, such as those in Valencia, and to oversee the regional accounts to prevent falsification and creative accounting. But it is excessive to arrogate to itself the capacity to entirely micromanage the economy of a regional government on the grounds of a mere indication that it is not complying with the terms of the bailout plan.