IMF urges early crackdown on Spain’s fiscally slack regions

Although the Budget Stability Law in Spain allows the central government to impose “coercive measures” on regions that are recalcitrant in meeting their fiscal targets, the International Monetary Fund believes that a lot more should be down to make budget-deficit offenders toe the line.

In an annex to its latest report on the Spanish economy released last week, the IMF’s experts called for a disciplinary system under which regions failing to meet their goals in restoring their finances should be shown a “red card” that would spark intervention by the national Finance Ministry.

The regions in 2012 managed to cut their deficit for the first time during the current crisis from 3.3 percent of GDP in 2011 to 1.8 percent on average, against a target of 1.3 percent. But some regions were way off the goals they had been set.

The Budget Stability Law allows the central government to issue a formal warning to regions that fail to reach their goals for the year. But the IMF want the regions to be set monthly goals and for an “informal warning” to be issued after failure to comply with fiscal targets after the first month.

If the region fails to rectify the situation the following month, then the IMF proposes it should be issued a “formal warning,” or “yellow card.” This should trigger orders from the central government for the offending region to raise taxes and/or cut spending.

If the region fails to mend its ways in the following month, then the IMF recommends it should be shown a “red card,” which could mean the national Finance Ministry sending in its own men to take over the reins of the region’s finances.

The IMF wants the Independent Fiscal Authority, which is still in its infancy, to be the body that blows the whistle on regions whose finances are getting out of hand. It believes in this way it could help reduce tensions between the central government and the regions.