Bloomberg News

Spanish Budget Cuts Won’t Have Lasting Impact, Economist Says

August 24, 2012

Spain’s 17 semi-autonomous regions, charged with the bulk of the government’s planned budget cuts this year, are relying on one-off reductions that won’t solve their long-term fiscal woes, economist Juan Rubio-Ramirez said.

“The plans are mostly one-time expenditure cuts or revenue increases, so they aren’t addressing the regions’ long-term budget issues,” Rubio-Ramirez, an economist at Duke University in Durham, North Carolina, said in an interview in Madrid yesterday. “They’re hard to understand and there are clearly incoherencies in some parts.”

Prime Minister Mariano Rajoy has ordered Spain’s regions to make 70 percent of all cuts in the 2012 budget deficit as he aims to tackle the euro area’s third-largest shortfall amid a recession and a surge in borrowing costs. Municipalities must come up with 3 percent of the savings, with the central government and welfare system responsible for the remainder.

The regions accounted for most of Spain’s overspending last year, pushing its budget gap to 8.9 percent of GDP compared with a target of 6 percent. Economists predict the gap will exceed the European Union’s target of 6.3 percent in 2012. The central government in June exceeded its limit for the year as it bailed out regions, town halls and the welfare system.

Regional budgets were “artificially” balanced in the first quarter with an 87 percent increase in transfers from the state, Rubio-Ramirez said. In the period, the regions made 4 percent of payroll reductions planned for the year. A sharp fall in current expenditures suggests that outlays in the previous quarter may have been inflated or spending was postponed, he said.

Health Care, Education

Most of the regions’ austerity measures involve selling real estate or postponing infrastructure projects, Rubio-Ramirez said. They do little to curtail big-ticket items such as health care and education, he said.

A report released earlier this month by the Fedea research institute in Madrid concluded that the regions won’t keep their economic promises this year. It forecast overspending for the regions may reach 4 percent of gross domestic product, compared with 3.3 percent last year and a target of 1.5 percent. Rubio- Ramirez co-authored the report.

Regions’ budget plans take into account debt financing costs as well as lower tax receipts, a Budget Ministry official said on condition of anonymity in line with government policy. All regional budget data are revised by the administration’s public account auditors, the official said.

Regional budget data for the second-quarter are due in September. The central government is scheduled to release data for July on Aug. 31.

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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