Budget Hole Undermines Spain’s Plans

Economists have uncovered a hole in Spain’s budget that threatens to allow the country’s regional governments to overspend this year, calling into question the credibility of Madrid’s deficit reduction plan agreed with Brussels.

Travelpix Ltd | Photographer's Choice | Getty Images

The discrepancy in this year’s spending plans for Spain’s 17 autonomous regions—which have become one of the main battle grounds for prime minister Mariano Rajoy’s austerity program—could allow the regions to exceed their agreed budget deficit for 2012 by almost 10 percent.

Under the regional spending plan signed off in May by Cristobal Montoro, Spain’s budget minister, the regions have been approved to claim back 9.7 billion euros ($12.1 billion) in bills generated last year but left unpaid.

Yet this sum exceeds the total of 8.5 billion euros of 2011 unpaid spending declared by the regions last year.

The resulting 1.2 billion euros hole amounts to about 8 percent of the 15 billion euros deficit the regions are allowed to run this year, based on an agreed total regional deficit of 1.5 percent of Spanish gross domestic product (GDP) for 2012.

“The government has either made a significant error in the accounts, which damages the credibility of the budget plans, or they are trying to hide something,” said Juan Rubio-Ramirez, a professor of economics at Duke University who has examined the accounts in a study for Fedea, a non-profit economics research foundation.

“It means the regions appear to have been given 1.2 billion euros which is not really there,” Mr. Rubio-Ramirez said. Spain’s budget ministry declined to comment.

Efforts to impose tighter spending on the regions by Spain’s central government have been met with resistance, with Cataloniaboycotting a meeting held between regional finance ministers and Mr. Montoro in late July, and Andalucia storming out half-way through.

The state auditor, IGAE, normally takes more than a year-and-a-half to process numbers provided by the regions. Accounts supplied in December 2010 were only finalized in July of this year, with this years’ spending plan unlikely to be finally audited until 2014—meaning there is unlikely to be a formal explanation of the discrepancy until then.

Under the terms of Spain’s request for 100 billion euros in European aid for its banks, Madrid was allowed to relax its budget deficit reduction plan, being given a softer target of 6.3 percent of GDP (CNBC Explains: What Does GDP Mean?) for this year compared with a previous 5.3 percent, and until 2014 to reduce the budget deficit to below 3 percent compared with a previous deadline of 2013.

Analysts have raised concerns over whether the Spanish government will be able to meet these new targets, with much depending on reining in regional spending and the effectiveness of tax increases, such as a rise in VAT, at a time when the country remains stuck in recession (CNBC Explains: What Is a Recession?).

“It’s difficult at this point to project whether the central government will be able to meet the end-year target,” analysts at Barclays said earlier this month.

“Meeting the deficit will fundamentally rely on the effectiveness of a new set of fiscal measures … In our view, we think that risks remain tilted towards fiscal slippages for regions and social security.”