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Spain to limit regional spending to control deficit

Published on 28/06/2011

Spain, seeking to reduce a bloated deficit that markets fear may make it the next Eurozone nation to need a debt bailout, said Tuesday it will limit spending by its powerful regional governments.

Prime Minister Jose Luis Rodriguez Zapatero said the measure would be formally proposed next month and will be similar to a limit on spending already in place for the central government.

It is needed to “guarantee fiscal sustainability in the mid-term,” he told parliament during an annual state of the nation debate.

Spain’s regional government debt, at about 121 billion euros, is a major concern for the markets which fear it could compromise the central government’s goal to cut the annual public deficit down to 6.0 percent of Gross Domestic Product this year and to a eurozone limit of 3.0 percent in 2013.

While the central government managed to cut the deficit from 11.1 percent of GDP in 2009 to 9.24 percent in 2010, the regions pushed up their deficit from 1.92 percent to 2.83 percent.

“The information from the first quarter which we have from some autonomous communities indicates the existence of uncertainties, which reminds us that meeting our (deficit) goal requires the strict application of the path set out of all public administrations,” Zapatero said.

Earlier this month Moody Investors Service warned that Spain’s government would find it “very difficult” to meet deficit-cutting targets because it could not curb wayward regions such as Catalonia, whose economy is the size of Portugal’s.

Last week, the International Monetary Fund criticised a lack of transparency in the semi-autonomous regions’ deficit reporting and called for a strict application of Madrid’s deficit rules on wayward regional governments.

“The larger risk to the 2011 target is that some regional governments may again miss their targets,” it said in a report on Spain’s economy.

Spain has a highly decentralised system of government and budget management, with its 17 regional governments having considerable autonomy, including the right to issue bonds to finance their expenses.

They run schools and hospitals and account for around one-third of general government expenditures — and just over half of the nation’s total number of civil servants.

Zapatero’s cabinet on Friday approved a 3.8 percent reduction in central government spending for next year to 117.4 billion euros ($167 billion), as it fights to retain the trust of markets rocked by Greece’s sovereign debt crisis.

A rescue for Spain would be far bigger than anything seen to date in Europe — its economy is twice the combined size of Greece, Ireland and Portugal, the three eurozone nations which have been bailed out by the European Union and International Monetary Fund.