Spain needs to get a handle on spending by profligate regions, Fitch says

Spain needed to get a handle on spending by its regional governments, but even the central government’s budget deficit in Madrid failed to register any improvement last year when adjusted for the effects of the economic cycle, one of the top three sovereign debt ratings agencies said.

The shortfall between the Spanish government’s expenditures and revenues in 2015 declined from 5.9% of gross domestic product to 5.1% in 2015, 5.0% if bank recapitalisation costs were excluded, the European Union’s statistical arm, Eurostat, said on Thursday evening, Fitch Ratings said in a statement.

Nevertheless, that was short of the official target of 4.2% agreed with Brussels and even of Fitch said.

Madrid’s deficit was 0.3 percentage points within the target, at 2.6% of GDP, thanks to strong above-trend growth.

However, regional and social security budgets were off by 1.0 and 0.7 percentage points each, respectively.

Those results confirmed Fitch’s view that the country's high stock of public debt, at 99% of GDP, was only set to come down “gradually”.

Indeed, earlier in the week the government had raised its 2016 goal for the budget deficit from 2.8% to 3.6%.

If Spain were to enforce its Budgetary Stability Law more effectively that would bolster its fiscal credibility, Fitch added, echoing recent criticism from the European Commission.

Referencing preliminary 2015 Ministry of Finance figures, Fitch said regions’ operating balance was €6.4bn, up from €3.3bn in 2014.

Many regions had budgeted for a positive current balance in 2016 but Fitch remained sceptical.

That meant the central government would continue to be called upon to help finance debt repayments through the issuance of new debt.

Moves by Madrid to add more conditions on regions’ access to its funding might require that €10bn of regional budgets be reprioritised, increasing tensions between the central government and regional officials.