Regional deficit reduction

Contrary to some populist simplifications, in 2012 the Spanish regional governments have made considerable efforts to put their finances in order. To gauge this effort more exactly we must await the year’s final balance, which is normally worse than the forecasts. General expenditure has been reduced by 2.17 percent, investment being the area hardest hit, with a 25.3-percent drop, while current expenditures have increased by 14.93 percent — in spite of the fact that outlays on salaries have diminished by 4.5 percent — due to the thousands of working and administrative jobs that have been cut.

No doubt the orientation of efforts in spending reduction could be improved. The easiest thing to do is to sacrifice investments, as has been done initially, with the recessive effect thus induced. And next, to cancel precarious jobs. It seems hard to see why overall current expenses should be rising, when salary-connected ones are falling. Part of the secret of the imbalances lies in the rising cost of regional debt. Although debt has decreased, interest rates charged on it have increased due to the rise in the risk premium.

There is room for improvement, indeed, but the fact is that regional finances have been cleaned up considerably. While they finished 2011 with a deficit of 3.4 percent of GDP, they will finish 2012 at somewhat over 1.5 percent, a notable improvement, amounting to a reduction of a half. This has been possible too, in great measure, thanks to two instruments placed at their disposal by the government: the plan for (delayed) payments to suppliers, and the regional liquidity fund. Both of these are very useful mechanisms, but their creation merely reflects routine political responsibility at the internationally responsible level of administration, not any sudden attack of generosity.

The Finance Ministry will do well to abstain from further haughty threats to the regional governments, and to recognize their efforts. Particularly because we are talking about demands heavier than those the central government has imposed upon itself. In three years, the deficit of the regions must fall first from 3.4 percent to 1.5 percent, and then to 0.7 percent in 2013, being reduced by half each year.

Meanwhile the central government is giving itself more room, at 4.5 percent this year and 3.8 percent the next, which entails an excessive advantage for the central government in relation to the regional ones — who are also looking at the most inelastic and socially delicate areas of expenditure: education and health care.

This advantage becomes abusive, if we consider that the entire budgetary margin afforded by hikes in the most revenue-producing taxes (income tax and VAT) and by the leeway granted by the European Commission, is being monopolized by the central government alone. The regions are in the right when they demand that the greater flexibility that Brussels is about to grant to Spain for the next two years should be passed on to them. This should also serve to prevent social and welfare expenditure from being unduly strangled.