Spain Plans More Austerity, But Regions Rebel

Madrid is struggling to balance spending as its provinces grow restless.

Spain’s conservative government announced additional austerity measures on Thursday in an attempt to fend off speculation that it will have to apply for a European bailout. But as resistance to deeper spending cuts mounts in several of its autonomous provinces, Madrid will be hard pressed to achieve the necessary deficit reduction.

Deputy Prime Minister Soraya Sáenz de Santamaría described the 2013 budget, which cuts 8.9 percent in ministerial spending on average, freezes public-sector wages and pulls €3 from the country’s pension reserve fund to mend the deficit, as “a crisis budget designed to exit the crisis.”

Spain’s central government deficit stood at nearly 4.8 percent of gross domestic product at the end of August while the target for 2012 had been set at 4.5 percent. It was originally supposed to reduce its shortfall to under 3 percent next year to comply with European fiscal rules but has been granted a one year respite to meet this goal.

This year’s disappointing fiscal numbers are largely due to an unexpected decline in economic output which the nation’s central banks says has accelerated “at a significant pace” during the third quarter of this year. Standard and Poor’s expects the Spanish economy to contract another 1.4 per cent in 2013.

Prime Minister Mariano Rajoy, who assumed office in December of last year, has already increased the sales tax, cut unemployment benefits as well as public-sector salaries and announced plans to privatize airports, harbors and railway assets. The previous administration had raised income taxes and excise duties on tobacco and gasoline.

After the Spanish housing market collapsed in 2008, government spending as a share of GDP reached a record high of 46.3 percent. The ruling socialists attempted Keynesian stimulus at the time that did little to shift employment from construction or create jobs in it. More than one out of five Spanish workers is currently unemployed. Among the young, the jobless rate stands at over 50 percent.

Rajoy’s government can do little to force Spain’s autonomous provinces, which account for more than half of total public-sector spending, to tighten their belts. Even in regions where his own conservative party is in government and has been for years, the financial difficulties are pressing.

Spanish regions have committed to find over €18 billion of savings by the end of this year, almost half of the nation’s planned deficit reduction before the government announced additional austerity measures on Thursday, but given their past record, they are unlikely to deliver. That could force the central government to borrow more to foot their bills.

Rajoy commands the necessary majority in parliament to enact political reforms that would enable Madrid to take control of provincial finances but areas like Catalonia and the Basque Country in the north are highly nationalistic and would likely resist any changes that dilute their autonomy.

Rising calls for independence from within Catalonia, one of Spain’s wealthiest regions, ahead of an early regional election scheduled for November, have added to uncertainty over the premier’s ability to make powerful regional barons accept deeper spending cuts.

With an economy twice the size of Greece, Ireland and Portugal combined, countries that have previously received European bailouts, a deepening of the debt crisis in Spain would severely test Europe’s ability to maintain economic stability and could threaten the future of the eurozone.

In June, European leaders pledged €100 billion in support of Spain to shore up its financial sector. The Spanish government is said to be exploring ways to divert part of the bailout to boost its own deficit reduction program.