Spanish regions forced to make budget cuts as political deadlock continues

Although a sustained economic recovery ended Spain¡¯s era of austerity around five years ago, the prolonged political deadlock is now threatening to bring back the budget cuts.

Only Navarre and the Basque Country, with different financing systems, are being spared

Several regional governments have announced a new raft of adjustments due in large part to the lack of a national budget, which is holding back around €5 billion in funding that regional leaders had been expecting to have by now.

Spanish regions were expecting to receive €105.3 billion this year, around €5 billion more than last year, based on the central government¡¯s forecast of increased public revenues stemming from the economic growth. Under the system, the government estimates how much more money will flow into public coffers, and it gives regions an advance until the predictions are confirmed.

Spain¡¯s financial authorities are now warning that the situation could get worse in November if there is still no central government by then. The country held an early general election on April 28, partly due to acting Prime Minister Pedro S¨¢nchez¡¯s inability to get his budget blueprint approved by parliament.

S¨¢nchez, who heads the Spanish Socialist Party (PSOE), won the election but fell short of a majority, and he has so far been unable to attract enough political support to form a new government. If no deal emerges by September 23, parliament will be dissolved and a new election called for November ¨C the fourth in four years.

On Friday of last week, S¨¢nchez said he will offer a ¡°progressive program¡± to the leftist Unidas Podemos, the Basque Nationalist Party (PNV) and the small Regionalist Party of Cantabria (PRC) in the hopes that they will support his second bid to form a government after failing in his first attempt in July.

Regional cuts

Catalonia has announced new spending cuts across the board, except for essential services and government workers¡¯ salaries, said regional government sources. In the Valencia region, which had been expecting around €450 million, authorities will cut back on funds that have not yet been allocated. Andalusian leaders have denied that there will be any cuts to meet deficit targets, but 75% of the regional budget depends on financial transfers from Madrid.

Other regional leaders have admitted that they will have to consider cuts if the political deadlock persists; only Navarre and the Basque Country, which have a different financing system, are being spared the effects of the blocked budget.

Spain¡¯s acting finance minister, Mar¨ªa Jos¨¦ Montero, has told the SER radio station that she has a report by the Solicitor General¡¯s Office backing the use of a decree to release €5 billion as an advance as soon as a new government is in place. But ¡°this cannot be done by an acting government, because it would condition the next executive¡¯s scope for action.¡±

A new budget would also let central authorities release a further €2.5 billion thanks to a change in VAT accounting regulations, but again, this cannot be done by an interim administration. Montero has denied that the PSOE is using this to pressure other parties into facilitating a new government. ¡°We are not using this to tighten the screws,¡± she said.

If cross-party talks fail and there is no government by November, Montero said that she will do everything possible to find a solution to help the cash-strapped regions. A few days ago, S¨¢nchez made a pledge to seek a new financing model for Spain¡¯s regions within his first year in office if he is allowed to form a government.

English version by Susana Urra.