Blog Post

Are regional governments causing deficit overshooting in Spain?

Spain once again missed its deficit target in 2015 and it seems unlikely that 2016 will be any better. The central government has pointed to regional deficits as being the cause of the fiscal slippage. However, regional governments claim that their deficit is due to under-financing and overly strict deficit targets.

By: Date: April 19, 2016 Topic: European Macroeconomics & Governance

Spain is again in the spotlight due to having missed its deficit target under the Stability and Growth Pact (SGP). It is not the first time Spain has missed the target. In 2009, the Council of the European Union concluded that an excessive deficit existed in Spain and requested the country to end it by 2013.

In 2013 Spain received an extension, giving it until 2016 to correct its excessive deficit. The European Commission argued that ‘effective action’ (i.e. expenditure cuts, tax increases and structural reforms) had been taken, but that ‘adverse economic events’ had prevented the economy adjusting within the agreed timing.

The targets set in 2013 for the deficits in 2014 and 2015 were 5.8 and 4.2 percent of GDP respectively. Although in 2014 the deficit target was reached, Spain recorded a deficit of 5.2 percent of its GDP in 2015, 1 percent above the target set by the Council (see Figure 1).

Figure 1. Fiscal deficit as a share of GDP in 2015, broken down by administrative level

Note: ‘Autonomous communities’ represents the Spanish regions

Source: Eurostat and Spanish Ministry of Finance

Fig 1

This time it looks like the European Commission has run out of patience. On the 9 of March 2016, it released an ‘Autonomous Commission Recommendation’. This consists of an early alert to ensure timely correction of excessive deficits, a tool which was introduced in the ‘Two-Pack’. This instrument had only been used twice before, for France and Slovenia in 2014.

Two main reasons for non-compliance with the deficit target are highlighted in the document:

  • First, the fiscal reform that the central government implemented in 2015 reduced personal income taxes.
  • Second, while regional deficits increased more than expected in 2015, the Spanish government did nothing to stop this, despite having political instruments at hand (the budgetary stability law allows for coercive measures if deficit targets are not reached, such as withholding credit provided by the state).

Indeed, Figure 1 shows that while the central government met its fiscal target and local governments even had a surplus of 0.4%, the regional deficit exceeded its target by 1% of Spanish GDP and the social security fund deficit (managed at a central level) was 0.6% higher than the objective.

Spain is currently in an extremely delicate political situation, with new elections on the horizon. Therefore, it is unlikely that Spain will manage to fulfil the 2.8% fiscal deficit objective set for 2016. Anticipating this, Prime Minister Mariano Rajoy is negotiating a relaxation of the target with the European Commission (from 2.8% up to 3.7%).

The central government has taken distinct measures to contain regional budget deficits. For instance, the Spanish Minister of Finance and Public Administration, Cristóbal Montoro, has sent letters to the different Autonomous Communities (Spanish regions) which have exceeded their deficit objectives (14 of out 17, not including the two autonomous cities, Ceuta and Melilla), warning them to adjust their public finances. Moreover, two Spanish regions (Extremadura and Aragón) have seen some of their funds seized for paying their suppliers too late. Finally, Montoro held a meeting last week with his regional counterparts to make sure that regional spending does not increase during 2016.

The regional Finance Ministers’ reactions did not take long. Their claims can be summarized in two main arguments.

  1. Spanish regions are under-financed. The common argument used for sustaining this hypothesis is that while the regions have acquired important duties over the last two decades on the expenditure side, such as provision of public services (education and healthcare), they have not obtained corresponding rights on the revenue side.
  2. Regional deficit targets are too strict. Regional public spending is around one-third of total public spending, as ‘El País’ points out. Consequently, regional politicians argue that while central government allows itself to have a loose deficit target, it shifts fiscal consolidation to the regional level by imposing too strict fiscal targets.

Whatever the causes of the excess deficit in 2015, Spain may face negative consequences. If Spain does not comply with SGP rules, it could face a fine of 0.2% of its GDP (around 2 billion euros). Although this measure seems unlikely, the Council fined Spain with 19 million euros last year for manipulating statistics, based on a proposal by the European Commission. The reason was that a fraction of healthcare expenditure in one of the Autonomous Communities was hidden with the aim of disguising its deficit figures.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Macroprudential policy: The Maginot line of financial stability

The ability of macroprudential policies to assure financial stability and thus leave central banks free to assign the interest rate tool exclusively to price stability is unproven. As the Maginot line did not protect France from a German invasion in WWII, so macroprudential policy may not be sufficient to counter financial instability. Central banks should prepare to deal with dilemmas in the use of the interest rate.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article More on this topic More by this author

Podcast

Podcast

The future of Capital Markets Union

Bruegel senior scholar Nicolas Véron speaks with Steven Maijoor, the chair of ESMA, about the future of the Capital Markets Union (CMU), and of the EU's financial supervisory architecture.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: November 16, 2017
Read about event More on this topic

Past Event

Past Event

Financial Stability Conference 2017

EU at Crossroads: How to respond to Misalignments in Bank Regulation and achieve a consistent financial Framework?

Topic: Finance & Financial Regulation Location: Berlin, Germany Date: October 18, 2017
Read article More on this topic More by this author

Blog Post

Catalonia and the Spanish banking system

As tensions rise around Catalonia's independence movement, there are worries about the impact on the Spanish banking sector. Banks based in Catalonia account for around 14% of total assets. Some major institutions are already moving their headquarters to other parts of Spain. However, most Spanish banks have significant exposure to the Catalan market, and all could be caught up in the turmoil.

By: Yana Myachenkova Topic: European Macroeconomics & Governance Date: October 6, 2017
Read article Download PDF More on this topic More by this author

Policy Contribution

Precautionary recapitalisation: time for a review?

While precautionary recapitalisation is a legitimate instrument for bank crisis management, the conditions set for it by BRRD (Bank Recovery and Resolution Directive) are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Nevertheless, the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 13, 2017
Read article Download PDF More by this author

External Publication

European Parliament

Precautionary recapitalisations: time for a review

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is a legitimate instrument for bank crisis management. The conditions set for it by BRRD are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Outside of the scope of BRRD, the co-legislators should consider a reform of the EU audit framework to improve audit quality, and the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: European Parliament, Finance & Financial Regulation Date: July 12, 2017
Read article Download PDF More on this topic More by this author

Policy Contribution

A macro approach to international bank resolution

As regulators rush to strengthen banking supervision and implement bank resolution regimes, a macro approach to resolution is needed that considers both the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. This can be facilitated through the completion of a banking union in which the European Stability Mechanism (ESM) becomes the fiscal backstop to the euro-area banking system.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 10, 2017
Read about event

Past Event

Past Event

Is there a way out of non-performing loans in Europe?

At this event we looked at the issue of non-performing loans in Europe. The event also saw the launch of the latest issue of "European Economy – Banks, Regulation and the Real Sector."

Speakers: Emilios Avgouleas, Giorgio Barba Navaretti, Giacomo Calzolari, Maria Demertzis, Martin Hellwig, Helen Louri and Laura von Daniels Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 6, 2017
Read article More on this topic

Blog Post

EBA relocation should support a long-term ‘twin peaks’ vision

As the Commission launches a review of European financial supervision, the authors argue that Europe needs to move towards a twin peaks model – dividing supervision of prudential and conduct-of-business issues. But this is a long-term vision, and will require institution building. The immediate priorities are to choose a new home for the EBA and reinforce ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: April 5, 2017
Read article Download PDF More by this author

Policy Contribution

European Parliament

Carving out legacy assets: a successful tool for bank restructuring?

Separating ‘legacy assets’ from banks’ core business is central to the rehabilitation of Europe’s banking system. How can Europe progress in its ongoing effort to rid the financial system of legacy assets, and equip it with renewed growth?

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 21, 2017
Read article Download PDF More by this author

External Publication

European Parliament

Carving out legacy assets: a successful tool for bank restructuring?

Separating ‘legacy assets’ from banks’ core business is central to the rehabilitation of Europe’s banking system. How can Europe progress in its ongoing effort to rid the financial system of legacy assets, and equip it with renewed growth?

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 17, 2017
Read article Download PDF More on this topic More by this author

Policy Contribution

What happened to global banking after the crisis?

The global financial crisis allegedly led to the end of global banking. However, Dirk Schoenmaker finds that reports of the demise of global banking are premature.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: March 14, 2017
Load more posts