Spain: Regioanl Budget Deficits

IT IS a huge, gleaming spaceship moored imperiously in an old riverbed. But Valencia’s iconic City of the Arts and Sciences complex floats on a tempestuous sea of regional debt.

 

The dazzling masterpiece, by Santiago Calatrava, a local architect, is a reminder of the buoyant optimism that swept through this eastern region during Spain’s boom years. But as Mariano Rajoy, the new prime minister, gets to grips with the country’s fiscal problems, all eyes are on the regional governments that funded glittering projects like this.

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Spain

Mariano Rajoy

 

Mr Rajoy’s centre-right People’s Party (PP), which took power in December, largely blames the regions, which provide key services and account for a third of the country’s public spending, for Spain’s failure to meet last year’s budget-deficit target agreed with the EU. Definitive data is absent, but the government says it missed the goal of 6% of GDP by at least two percentage points. The regions had been told to limit their deficits to 1.3%. FEDEA, a think-tank, reckons Valencia was one of the worst offenders, with an estimated deficit of 4.2%. Moody’s, a ratings agency, has reduced the region’s creditworthiness to junk status.

 

Valencia’s budget boss, José Manuel Vela, puts the 2011 deficit lower, at 3-4%. He blames the previous Socialist government in Madrid for starving the regions of funds. But he admits to having been surprised by the depth of the downturn that set in after Spain’s housing bubble burst. “We all thought it would carry on. That was a mistake.” Not one of Spain’s 17 regions met the 1.3% target last year, according to FEDEA.

 

As Spain battles to convince its European partners and the markets that it can rein in the overspend, Valencia will be watched, not least because Mr Rajoy’s party has run it for 17 years. If the PP cannot clean up its own backyard, what hope elsewhere? Mr Vela insists his government will meet its 1.3% target this year. He has slashed spending and, against the PP’s principles, raised taxes. Angry protests show that the cuts have bitten. But Spain’s economy has nosedived in recent months. The IMF reckons it will shrink by 1.7% this year. Mr Vela says Valencia can cope with that, but more protests seem inevitable. He pledges a balanced budget by 2014.

 

A new draft budget law hands the government some big sticks. Failing regions face fines, inspectors and intervention. But Mr Vela wants help, too. Loosening obligations on the regions would be a start. A shorter list of part-funded prescription drugs, for example, would save money.

Source: The economist

 

In the meantime Mr Rajoy’s government wants greater realism about Spain’s growth prospects and, implicitly, its ability to crunch its budgets. This year’s national deficit target of 4.4% assumes growth of 2.3%. Cristóbal Montoro, the budget minister, says such a figure does not help the government to be “realistic”. Mr Rajoy, wary of accusations of backsliding, carefully pledges to meet whatever target he is set.

 

Catalonia, Spain’s wealthiest region, is a cheerleader for slow consolidation rather than shock therapy. It rebelled against last year’s target, vowing to spread its adjustment over two years. This was glaring proof of Madrid’s inability to impose its will. FEDEA estimates that Catalonia beat its own 2.6% target this year. That is overgenerous, but makes the region’s pledge to hit 1.3% this year more credible. “To establish unreachable goals is to destroy confidence, which is what we most need,” says Artur Mas, the Catalan president.

 

José Ignacio Conde-Ruiz of Madrid’s Complutense University thinks the 4.4% target can be met. There are reasons to believe him. The absence of regional elections (except in Andalusia, which votes in March) removes from politicians a temptation to splurge. Thirteen regions are run by the PP, which should allow Mr Rajoy to impose his will. Juan Rubio-Ramírez of Duke University in North Carolina thinks the government may be exaggerating last year’s deficit to give itself wriggle room.

 

A mystery remains. Spain’s regions went an estimated €14 billion ($18 billion) over budget in 2011. Who is financing the shortfall? Short-term bank loans and unpaid suppliers are the best guess. That is unsustainable. Mr Montoro is now offering help via the state’s credit institute. Valencia, which failed to cover the redemption of a €1.8 billion bond in December, already needs it. Before long others probably will too