Financial Times

May 27, 2013 10:33 pm

Rajoy’s regional deficit targets for Spain anger allies

By Tobias Buck in Madrid

Mariano Rajoy is facing pressure from party barons over his government’s plan to impose more spending cuts on Spain’s powerful regions. Critics are angry that “asymmetric” deficit targets could favour rich Catalonia over poorer regions.

In an attempt to restore party unity, Spain’s prime minister met regional leaders from his Popular party in Madrid on Monday, but the gathering ended without an agreement.

The central government wants the regions to lower their budget deficit from 1.7 per cent of gross domestic product last year to 1.2 per cent this year. The reduction is crucial to Spain’s campaign to lower the public deficit and slow the rise in the national debt.

Spain says it will post a budget deficit of 6.3 per cent this year, almost two points higher than forecast. Madrid now expects to meet the EU budget deficit target of 3 per cent only in 2016, according to a plan expected to be approved from the European Commission on Wednesday.

Mr Rajoy’s latest drive to tighten fiscal discipline has been complicated by the deep economic and political differences between Spain’s 17 regions. Recently, some of his closest party allies have denounced a plan that would set individual deficit reduction targets for the regions instead of imposing a uniform limit for all.

They fear that such an approach would impose a heavier burden on PP-governed regions, which have made big efforts to curb spending, than on heavily indebted regions run by the opposition, such as Catalonia and Andalucia.

Ignacio González, the president of the Madrid region and a senior PP leader, said on Monday: “If the deficit is fixed at 1.2 per cent, we all must have 1.2 per cent.”

Madrid told all the regions last year to comply with the same deficit target of 1.5 per cent of GDP. But the response was far from uniform, with some regions slashing their expenditure to meet the threshold and others falling well short.

Castilla-La Mancha, for example, lowered its deficit from 7.9 per cent of GDP in 2011 to 1.5 per cent last year. Valencia, in contrast, cut its shortfall from 5 per cent to 3.5 per cent, while Catalonia – which accounts for about a fifth of national output – posted a deficit of 2 per cent, down from 4 per cent the previous year.

Analysts say recent reductions have been impressive but warn that further consolidation will be harder to achieve. Juan Rubio-Ramírez, a professor of economics at Duke University in the US, points out that regional governments are responsible for healthcare and education, two budget items that are difficult to cut. “What the regions have done so far is cut investment very dramatically. But you cannot keep cutting investment forever – and the health bill will continue to grow in the long run.”

Catalonia poses a particular challenge, because of the recent surge in separatist sentiment among Catalan voters and the political leadership in Barcelona. The campaign for an independent Catalan state has been fuelled by perceptions that the region, which is among the richest in Spain, has been driven to the brink of financial ruin by the need to subsidise poorer parts of the country.

The plan to give easier deficit targets to Catalonia and other troubled regions is widely seen as a ploy to calm political tensions and avoid a broader re-organisation of the financial relationship between the state and the regions.

“A few regions currently pay much more [into the central budget] than the rest,” said Prof Rubio-Ramírez. “This is a fast and easy way to undo some of [that] asymmetry.