Spain Deficit Goals at Risk

Towns and regions are squabbling with the government about spending and how to allocation tax receipts.

Quarrels over who bears the brunt of cuts worth more than 10 percent of Spain’s annual gross domestic product threaten Prime Minister Mariano Rajoy’s plan to tackle the euro area’s third-largest deficit as a second bailout looms.

A seven-day rally that has driven Spain’s 10-year yield to 6.1 percent at 10:55 a.m. in Madrid from 6.9 percent may falter as squabbles between the government, regions and towns about spending and tax receipt allocations hobble deficit reduction. Spain will miss its targets for budget gaps of 6.3 percent of GDP this year and 4.5 percent in 2013 as the nation’s recession worsens, according to the median forecast of 12 analysts surveyed by Bloomberg News.

“As budget deficit targets look unachievable, the risk of a potential full bailout of the Spanish economy is still there,” Jaime Becerril and Axel J. Finsterbusch, analysts at JPMorgan Chase & Co. in London, wrote in a note. “Further measures must be taken to restore market confidence.”

Five regions will boycott rules depriving illegal immigrants of free health care, while towns such as Hospital de Orbigo and Cartagena are trying to alleviate the austerity burden on families, one by paying for school books, the other by compensating civil servants for wage cuts.

Spain signed off July 24 on as much as 100 billion euros ($125 billion) of aid from European rescue funds to shore up banks burdened with bad loans. Rajoy, who broke his first election pledge after nine days of office, is weighing a second bailout as he struggles to implement his fourth round of tax increases and spending cuts in eight months to preserve market access for the euro area’s fourth-biggest economy.

Town halls are asking to share regions’ incomes and suggesting that responsibilities including paying for school maintenance might be reassigned. Madrid has discussed cutting back on its civic duties while criticizing that 83 percent of the taxes it collects go to poorer regions. Valencia, the second-most indebted region, said its debt load would be 60 percent smaller if it had received funding in proportion to its population.

“The problem is that each one is trying to save time by blaming someone else,” said Jose Antonio Herce, a public administration consultant in Madrid with Analistas Financieros Internacionales. “No one wants to tell voters they have to meet the targets with the resources they have because there simply isn’t more money.”

 

Spending Limits

Economists are predicting overspending may remain close to 8.9 percent of GDP for a second year. The central government exceeded in June its limit for the whole year as it bailed out the regions, town halls and the welfare system amid the second recession since 2009.

Rajoy has assigned 73 percent of the nation’s 2012 deficit-reduction effort on the regions and municipalities, forcing them to reduce shortfalls by respectively more than half and a quarter while continuing to fund public services such as health care and education amid a tax-receipts drought.

“It is difficult because the measures that need to be taken are very harsh,” said Leandro Esteban, a spokesman for Castilla-La Mancha, which had the highest regional deficit in 2011 at 6.07 percent of GDP. About 40 percent of temporary civil servants will be dismissed to cope with the previous government’s mismanagement, he said, citing the construction of an airport where grass now covers an unused runway.

The Socialist president of the northern Basque Country Patxi Lopez today told Cadena Ser radio he is moving local elections initially scheduled for March 2013 forward to Oct. 21 in order for Basques to choose how to deal with the crisis. “There is a lot of uncertainty about the future and our economic model is what counts,” he said.

“The efforts demanded of the different levels of government are unfair,” the Economy Department of Catalonia, Spain’s most indebted region and the largest contributor to its economy, said in an e-mailed response to questions. The central government has tightened regions’ goals while Spain’s were loosened and its own deficit cuts are a quarter of the regions’, according to the e-mail.

The 17 semi-autonomous governments won’t keep their economic promises this year, according to a report released this week by the Fedea research institute in Madrid. It forecast overspending for the regions may reach 4 percent of GDP, compared with 3.3 percent last year and a target of 1.5 percent.

 

‘Political Damage’

The government has ruled out cutting pensions next year and extended a temporary benefit for long-term jobless people to stem growing discontent, Afi’s Herce said. “Rajoy’s strategy is to wait and say little to avoid political damage in the short term.”

Overhauling pensions, which account for 32 percent of government spending, is one of the European Commission and International Monetary Fund recommendations Rajoy hasn’t yet introduced. Retirement pay has been his only spending increase, ending a freeze imposed in 2010 by his Socialist predecessors.

Support for Rajoy’s PP has slipped 8 percentage points since it won 40.6 percent of votes in a landslide in November. Since then, Rajoy has announced more than 100 billion euros of budget cuts, raising income and value-added tax, scrapping a tax break for home owners and cutting civil servants’ wages, unemployment benefits and health care and education spending against his word.

“We believe the Spanish bond market is in a perilous halfway house,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London, said in an e-mailed comment. “Germany is unwilling to sanction unlimited and unconditional support while Madrid is reluctant to cede more fiscal and economic sovereignty.”

 

Bloomberg News

 

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