Spain’s Richest Region Catalonia Aims to Beat Deficit Target

Catalonia, Spain’s richest region as well as one of its most indebted, is pushing to beat its 2011 budget-deficit target to help the nation avoid becoming the next victim of Europe’s sovereign crisis.

“We understand even the smallest reduction of the deficit below our 2.66 percent of GDP forecast will be appreciated,” Albert Carreras de Odriozola, Catalonia’s state secretary for economy, said by telephone yesterday from Barcelona. Any drop below that target will prove “our seriousness and capacity to control spending.”

Catalonia, the wealthiest of Spain’s 17 semi-autonomous regions with an economy the size of Portugal’s, had the third- largest budget gap in 2010, at 3.86 percent of gross domestic product. It also had the second-highest debt, at 19.2 percent of GDP in the second quarter.

Spanish regions control over a third of public spending, including health and education, playing a crucial role in the nation’s battle to cut its deficit to 6 percent of GDP this year from 9.2 percent. Under Prime Minister Jose Luis Rodriguez Zapatero, Spain is struggling to avoid following Greece, Ireland and Portugal into a bailout as its borrowing costs surge amid contagion from Europe’s debt crisis.

Carreras said his region’s officials met with the Finance Ministry in Madrid last week following Finance Minister Elena Salgado’s pledge on Sept. 8 to discuss adjustment plans with each of the 12 regions that registered a deficit above 0.75 percent in the second quarter. Catalonia’s shortfall was 1.01 percent at the end of June, according to figures released that same day, which aren’t directly comparable with the data employed in the final calculation of public-sector deficits.

Madrid Meetings

In the Madrid talks, Catalonia officials said they aim to exceed their budget goals because of deficit-cutting steps they’ve taken, even though they didn’t “dare fix a lower target because it’s a huge effort as it is,” Carreras said. Spending will be cut 10 percent this year and finances will also benefit from extra income, such as from the sale and leaseback of regionally-owned buildings, he said.

Catalonia and Castilla-La Mancha have committed to “minimize possible slippage” from their deficit goal this year, and the other regions have pledged to meet the 1.3 percent target in 2011, the Finance Ministry said in an e-mailed statement.

Deputy Finance Minister Juan Manuel Lopez Carbajo has held meetings with regional officials and their plans to rein in their deficits will be published in the “coming weeks,” the ministry said.

Spain holds elections Nov. 20 and opposition leader Mariano Rajoy, who leads in opinion polls, has pledged stricter budget rules as the country seeks to avert a credit-rating downgrade. He’s also vowed to stick to Spain’s current 4.4 percent deficit goal for 2012 and to cut “superfluous” spending, as the European Central Bank props up the nation’s debt by purchasing its bonds on the secondary market.

Regions’ Shortfall

The combined budget deficit of the regions, which use different methodology for year-end figures, of 1.2 percent of GDP in the first half is not “a cause for concern,” Salgado said on Sept. 8. “One can hope” the regions meet their deficit goal this year of 1.3 percent of GDP as they are all “are committed to their fiscal targets,” she said.

Catalonia forecasts it will reach the 1.3 percent target next year by further reducing spending and increasing revenue, Carreras said.

Fitch Ratings Director Douglas Renwick said on Sept. 13 that slippage by the regions “adds to pressure on the central government to make the needed cuts to meet the general government deficit targets” and that risks to Spain’s sovereign credit rating are “clearly on the downside.” Fitch downgraded five regions including Andalusia and Catalonia last week, saying debt is climbing and the weak recovery will undermine revenue.

Separately, Moody’s Investors Service termed the first-half regional budget data “credit negative,” and last month cited the regions’ fiscal backsliding as a reason for putting Spain’s credit rating on review for a downgrade. The review is due to be completed by the end of October.

Spain’s Senate approved the inclusion of budget rules in the constitution on Sept. 7, paving the way for final adoption. The amendment, only the second in the charter’s 30-year history, will bind all levels of government to deficit targets and fiscal rigor including the regions, which was not previously the case.

“Catalonia’s deficit figures have regularly been revised upward in the last years,” Carreras said. “It’s difficult, but we’re taking steps to try to avoid that from happening again.”

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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