Bloomberg News

Spain to Urge More Regional Budget Cuts as Deficit Deepens

July 31, 2012

Budget Minister Cristobal Montoro will urge Spain’s regions to extend budget cuts today during a meeting Catalonia plans to boycott, as efforts to prevent them defaulting deepen the central government’s own deficit.

Representatives of Spain’s 17 semi-autonomous regional governments are scheduled to convene in Madrid at 4:30 p.m. for a budget checkup. Data released today showed the central government exceeded its target for the 2012 budget shortfall with half the year still to go.

The biggest contributor to Spain’s economy, the Catalonia region centered on Barcelona, said today it won’t take part in the meeting to protest the central government’s rigid stance on deficits. No news filtered out from a separate gathering before the talks between Prime Minister Mariano Rajoy and regional executives from his People’s Party.

Rajoy is struggling to avoid a broader bailout after gaining the right to borrow as much as 100 billion euros ($123 billion) from European rescue funds for its banks. Its budget gap, the euro area’s third largest, remained almost unchanged from 2010 at 8.9 percent of gross domestic product last year.

Bond Yields

The yield on Spain’s 10-year bond was at 6.62 percent today, compared with a euro-era high of 7.75 percent on July 25 even as Rajoy announced his fourth round of austerity measures since Dec. 30. It fell after European Central Bank President Mario Draghi said last week he would do whatever is needed to protect the single currency.

The central government’s shortfall surged to 4.04 percent of gross domestic product in the first half of 2012 from 3.41 percent in the five months through May as it transferred funds to the rest of the public sector to prevent a liquidity squeeze, Deputy Budget Minister Marta Fernandez Curras said today in Madrid.

That compares with a central-government target for the year of 3.5 percent. Spain’s overall 2012 deficit goal, which includes all levels of government, is 6.3 percent.

Excluding 15 billion euros of transfers to regions, town halls, the social security system and the European Union, the central government’s gap through June was 2.56 percent of GDP, Curras said. The regions are set to present budget plans today as several show signs of deficit slippage, according to the ministry.

Budget Transfers

The regions, which account for more than one third of public spending, were mostly responsible for the 2011 slippage as they overshot their limit by more than 100 percent. This year, Rajoy’s seven-month-old government has organized as much as 41 billion euros in bank loans on top of budget transfers to allow them to pay suppliers and redeem bonds.

Still, Curras said Spain is on track to fulfill its commitments as an income-tax increase and corporate tax changes implemented this year are not yet having their full effect.

Curras said revenue from value-added tax will also improve, after falling 10 percent in the first half, as an increase announced in July will be implemented in September.

This year’s deficit targets for the central government, regions, town halls and social security remain unchanged at 3.5 percent, 1.5 percent of GDP, 0.3 percent and zero respectively, even after other euro-area countries agreed July 10 to raise Spain’s combined 2012 target to 6.3 percent from 5.3 percent.

The extra percentage point gives Spain room for maneuver to guarantee the overall target is met due to “uncertainty,” Curras said. In the first half, Spain’s interest costs to service its debt rose 32.6 percent from the first six months of 2011.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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