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Spain Softens Austerity for Regions Anticipating EU Leeway

Spain is preparing to ease austerity for its most cash-strapped regions in anticipation that European Union peers will grant the government more time to reorder public finances in the second year of a recession.

“All options have to be studied given how much the range of regional deficits has widened,” Budget Minister Cristobal Montoro told reporters in Madrid following a three-hour meeting with regional budget chiefs last night. A task force has been created to study how individual debt and deficit goals could be set for the 17 semi-autonomous regions, Montoro said.

Montoro said the government would ease regions’ combined deficit goal of 0.7 percent of gross domestic product in 2013 if the European Commission relaxes Spain’s target. “The earlier we get new targets, the earlier we’ll all be set,” he said.

Prime Minister Mariano Rajoy this week started backtracking on his pledge to haul the euro region’s fourth-largest economy out of a six-year slump in the second half, saying the government may forecast a greater contraction than its current prediction of 0.5 percent. The International Monetary Fund estimates the economy will shrink 1.5 percent.

Forecasts must be conservative to make budget-deficit projections credible, Economy Minister Luis de Guindos said March 20. Spain is waiting for the commission to update its budget-deficit targets before submitting a new budget plan through 2014 this month. Spain’s current limits, as set by the European Union, are a 2013 deficit of 4.5 percent of GDP for all levels of government and of 2.8 percent for 2014.

Rajoy claims he cut the nation’s total shortfall by about 25 percent to 6.4 percent of GDP last year, excluding European aid to the banking sector. The central government accounted for more than half of the gap, while the regions’ deficits represented 1.7 percent of GDP, down from 3.3 percent in 2011. The rest was generated by Spain’s tax-funded pensions and unemployment benefits system and its more than 8,000 town halls.

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