The IMF considers that Spain’s greatest financial risk is certain Autonomous Communities not meeting the deficit objective

The International Monetary Fund wants the Spanish Government to “strengthen” the labour market reform, not give up on spending cuts and restructure the financial system. The same day, the Bank of Spain's Governor, Miguel Angel Fernández Ordóñez asked the Spanish Minister for Economy to be “stricter” on the Autonomous Community government’s deficit reduction. The Catalan Minister for Finance said on several occasions that Catalonia would meet the deficit objective for 2011 if the Spanish Government showed some institutional loyalty and paid the money it legally owes to Catalonia.

CNA / Gaspar Pericay Coll

June 22, 2011 01:30 PM

Madrid (ACN).- The International Monetary Fund (IMF) has sent a warning to the Spanish Government. It should not give up on reforms and pursue its current efforts. In addition, the IMF focuses on the reduction of the fiscal deficit and states that Spain’s “major risk” is that “some regional governments are not meeting the deficit objectives”. “The Central Government’s fiscal objective is vital and it’s the main goal. […] All levels of government need to meet their objectives”, states the IMF report. In addition, it asked for greater transparency in the Autonomous Community budgets, without making distinctions between them, putting all of them in the same basket. It also asked for local and regional accounts to be made available “with the same frequency and coverage than those of the central government”. The Governor of the Bank of Spain, Miguel Angel Fernández Ordóñez has also contributed to the debate asking the Spanish Ministry of Economy to be “stricter” with the reduction of the deficit of Autonomous Communities. Ordóñez defended his actions on Tuesday in the Spanish Parliament’s Committee of Economy and Treasury saying they need “to strictly apply the authorization system to issue debt”, through which Autonomous Community governments need a green light by the Spanish Government in order to loan out money. The Governor recognised that the transparency of Autonomous Communities accounts has grown lately, with the decision at the end of 2010 to publish them every quarter instead of every year. However, neither the IMF, nor Ordóñez consider the full picture and blame the Spanish Government for not paying the money it owes to the Communities and thus transferring its deficit to the regional administrations. They also put all the Communities into the same basket, without making specific distinctions.

Nevertheless, the IMF has focussed on some other direct responsibilities of the Spanish Government. It has asked Madrid to continue the ongoing reforms, to not give up on its efforts and achieve the restructuring of the financial sector (in particular of savings banks) and the labour market reform. According to the IMF, Spain’s structural reform plan “continues to be a challenge and urgent”. The IMF celebrates some of Prime Minister Zapatero’s reforms, but is asking for grater efforts and for taking “difficult decisions”. In addition, the international organisation states that Spain’s productivity is low and its labour market is not very functional. It concludes that the labour market reforms undergone need to be accomplished and “strengthened”.

The deficit is transferred to the Autonomous Communities, and therefore the blame

The Spanish Government has asked all Autonomous Community governments to meet a 1.3% deficit objective for 2011, which would contribute to Spain’s total objective of 6%. Autonomous Communities are responsible for 36% of Spain’s public spending and they are in charge of basic Welfare State services such as healthcare, education and social policies, which are always extremely delicate to cut their spending without affecting basic services. Besides, some communities such as Catalonia are even responsible for a greater part of the spending, as they have more devolved powers, such as police and prisons. Catalonia has to meet a 1.3% deficit objective, imposed by the Spanish Government to meet the 6% objective for the whole country. The Catalan Government has already presented an austerity plan which cuts all public spending by 10%, including closing surgery rooms, laying off temporary public employees, etc. However, the Catalan Government announced a 2.66% deficit for 2011, as the Spanish Government does not pay the funds that it legally owes. The IFM report blames the Autonomous Communities, which appear as irresponsible, but does not blame the Spanish Government for not paying the Autonomous Communities the money it legally owes them. In Catalonia’s case, it represents more than 2 billion euros (2.6 or 2.1 billion euros depending on the calculation formula). If the Spanish Government showed some institutional loyalty and paid this money to the Catalan Government, the latter would meet the deficit objective. The problem is that the Spanish Government would have more difficulties meeting its own deficit objective and should undergo further reforms and budget cuts, something extremely unpopular some months before general elections.

Another figure sheds greater light on the subject. Last week Spain’s public debt figures were released. The Spanish Government is responsible for 76% of Spain’s total public debt and the Autonomous Communities 17%. However, the share of the Autonomous Communities has increased, as they see their revenues decrease due to the economic slowdown, the Spanish Government not paying what it owes and public spending that cannot be drastically cut beyond 10% as it mainly affects Welfare State services.