Spain tries to head off deficit revolt

Spain's centre-right government moved today to head off any potential rebellion by the country's 17 autonomous regions over cost-cutting measures that are key to retaining credibility with its euro zone peers and financial markets.

Finance minister Cristobal Montoro was scheduled to meet with the financial heads from all of the regions later today to drive home the message of austerity.

The regions account for close to half of all public spending - the biggest parts of their budgets go on health and education - and almost all of them widely overshot their spending targets last year.

Spain's country risk, as measured by the spread between its borrowing cost and that of Germany, overtook Italy's this week as concerns have grown whether the regions, with a combined deficit of €30 billion, can tighten belts.

"There won't be flexibility ... The (central) state has taken a lot of steps, now it's up to the autonomous regions to take the next steps," Antonio Beteta, secretary of state for public administrations under Mr Montoro, said at a conference.

Mr Beteta was reacting to comments from politicians in various regions, that they should get some leeway, since the central government was giving itself some flexibility on its own deficit target this year.

Prime minister Mariano Rajoy defied the EU on Friday to soften Spain's  deficit objective, but even his more realistic target will be beyond reach if regional leaders, most of them from his own party, the PP, pose a similar challenge to his authority.

Anti-austerity protests mounted last week as students anticipate deep cuts in education and healthcare.

Spain's deficit target for 2012 had been agreed with the EU at 4.4 per cent of gross domestic product. But that was when the economy was expected to expand by more than 2 per cent this year.

It is now forecast to shrink by close to 2 per cent and Madrid has also said that last year's deficit came in much higher than expected.Rajoy said he would budget for a 5.8 per cent public deficit, arguing that he was not breaking EU rules because Spain would still be on track to reduce its deficit to 3 per cent in 2013, the ultimate goal.

However, he did not pass on much wiggle room to the autonomous regions, softening their joint deficit target to 1.5 per cent of GDP from the previous goal of 1.3 per cent.

Mr Beteta said the government was providing the autonomous communities some €35 billion in loans to be able to meet an enormous backlog of unpaid bills to street cleaners, health workers and other public contractors.Spain is a highly decentralised country with only 18 per cent of public money spent by central government.

Tensions between the centre and the regions has waxed and waned since the 1978 constitution gave them significant self government powers during the transition to democracy after the Franco dictatorship.

"Spain cannot be perceived as having a difficult legal structure. We need, and I will not tire of saying this ... to generate confidence and that is perfectly compatible with the concept of a Spain that is united in its diversity," Mr Beteta said.

Reuters