Spain’s Biggest-Deficit Region Rules Out Tax Increases to Tame Shortfall

Castilla-La Mancha, which has Spain’s biggest regional deficit, aims to cut the shortfall fivefold this year without raising taxes as it stays shut out of debt markets, President Maria Dolores de Cospedal said.

Cospedal said in an interview today she will seek to shrink a deficit that reached 6.5 percent of regional gross domestic product last year to meet a goal of 1.3 percent in 2011. Her government there currently has enough cash to pay wages through September, she said.

“Of course we are going to try to meet the target, it’s our obligation,” Cospedal, who is also deputy leader of the opposition People’s Party, said at the party’s headquarters in Madrid. “We rule out raising taxes, it’s against what we want and believe. Spain has never emerged from an economic crisis by raising taxes.”

Cospedal, 45, inherited the deficit when she led the People’s Party, which is in opposition nationally, to win Castilla-La Mancha on May 22 after three decades of Socialist rule. Spain’s 17 regions are crucial to its efforts to rein in the euro area’s third-largest budget shortfall, as they control health and education spending and employ half of the nation’s public workers.

Meeting Today

Regions have outstanding debt of 121 billion euros ($175 billion), or 11 percent of overall GDP. Contagion from the sovereign debt crisis has forced two of Spain’s most indebted regions to sell bonds to its citizens. Regional finance chiefs meet Finance Minister Elena Salgado at 5 p.m. today in Madrid to discuss their budgets and Salgado will brief reporters afterward.

Castilla-La Mancha, which can’t issue debt until the central government approves its spending plans, aims to negotiate with banks on “formulas” to pay suppliers which are owed more than 2.5 billion euros by the regional government, said Cospedal. The region’s debt amounts to 6.1 billion euros, or 16.9 percent of GDP, according to the Bank of Spain.

The region’s deficit in the first half was 4.9 percent of its GDP, said Cospedal. In the center of Spain and famous as home to the fictional character Don Quixote, Castilla-La Mancha accounts for about 3 percent of Spain’s economic output, a similar proportion to Greece’s weight in the euro region.

Election Defeat

The PP handed the ruling Socialists their worst local election defeat in May and also took the traditional Socialist stronghold of Extremadura. Polls show the PP, which eliminated a 6.5 percent budget deficit in the eight years it governed to 2004, will win general elections that must be held by March.

The People’s Party would win 45.9 percent of the vote, compared with 32.1 percent for the Socialists, a poll by El Mundo showed on June 5. While Socialist Prime Minister Jose Luis Rodriguez Zapatero says he wants to govern until March, 50 percent of Spaniards want elections before then, according to a separate poll by El Pais on July 3.

Cospedal, who will take one week’s holiday and work through the rest of August, plans to cut costs and “rationalize” public companies, she said. Spain’s 21 percent unemployment rate means now is not the time to make citizens pay for health services, while she aims to pool resources with other states and will create an office of budget control.

“We assume the debt we have inherited and we are going to do everything we can to turn the situation around,” she said. “The government of Castilla-La Mancha knows what is has to do and it will do it.”

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Sharon Smyth in Madrid at Ssmyth2@bloomberg.net

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

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