Spain’s finance minister has insisted that all 17 autonomous regions cut their budget deficits to agreed levels amid revived concerns among sovereign bond market investors at the nation’s finances.

Elena Salgado, together with Carlos Ocaña, the budget secretary, and other senior officials, met regional finance ministers in Madrid on Wednesday evening to implore them to comply with a deficit limit of 1.3 per cent of gross domestic product in 2011 and to map out austerity policies for the following three years.

Spain has regained credibility in the bond markets but was able to meet its overall 2010 public sector deficit target of 9.3 per cent of GDP only because the central government performed better than planned.

Nine of the 17 regions, by contrast, exceeded their deficit limits last year.

In 2011, the overall Spanish deficit is supposed to fall further to 6 per cent of GDP as Spain attempts to differentiate itself from weaker “peripheral” eurozone economies such as Greece, Ireland and Portugal, which have accepted financial rescue packages from the European Union and the International Monetary Fund.

But the newly elected Catalan nationalist government in the Catalonia region of eastern Spain – with an economy the size of Portugal’s – has already said it cannot meet its 2011 target, even after drastic cuts in public spending. Other regions are struggling.

Accumulated regional debt in Spain is a relatively small part of the national total, but it has doubled to more than €115bn ($169bn) in the past five years.

“The starting levels of debt are pretty low, but the deficits are worrying,” says Luis Garicano, professor of economics and strategy at the London School of Economics. “It is hard to change the path of spending on the welfare state, on education and health.”

Regional and municipal elections due across Spain next month have made politicians reluctant to cut spending.

Businesses have campaigned for drastic reform of Spain’s highly devolved system of government. In a report this week the Círculo de Empresarios, a business association, called for a correction of the “budgetary laxity” of some regional and local governments, an end to the overlapping responsibilities of the various levels of Spanish administration and a simplification of costly regulations.

Claudio Boada, the group’s chairman, also said the country’s 8,114 municipalities were “absolutely excessive” and should be reduced in number.

Spanish government figures show that regions and municipalities account for half of public spending, with the centre taking 20 per cent and social security the remaining 30 per cent. Regional spending as a share of the total has risen tenfold since 1982, while the central government share has fallen to less than half what it was then.
●Spain’s bonds show that the euro area’s fourth largest economy has set itself apart from the bloc’s most indebted countries, according to Olli Rehn, the EU’s commissioner for economic affairs. “Spain didn’t fall prey to the markets, its yields didn’t rise even after Portugal sought aid from the European Union,” he said in a speech at the University of Helsinki.

“What’s been decisive for Spain are the measures it has taken to stabilise its finances and reorganise its banking sector.”

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