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Brussels wants strict budget caps on Spain's regions

EU concerned over central control as parties dispute state of books

The European Commission on Tuesday weighed into a heated debate on the state of the finances of Spain's regions by urging the central government in Madrid to "strictly" enforce controls imposed on them to ensure the country meets its deficit reduction targets commitments.

In its latest review of Spain's Stability and Growth Program, Brussels noted that the regions account for a considerable part of public spending, with many exceeding the caps imposed by the central government on public deficits last year.

Then the government set the deficit cap on the regions at 2.4 percent of GDP, and trimmed that to 1.3 percent for this year. However, at the end of May, Catalonia unveiled a budget for this year with a shortfall of 2.66 percent of GDP.

That prompted Moody's Investors Service on Monday to highlight what it claimed was the "central government's limited ability to enforce budgetary discipline at the regional level."

The European Union executive recommended that growth in spending should be kept below the medium-term rate of GDP growth for all levels for government.

Marcelino Iglesias, a Socialist deputy leader, on Monday lambasted the conservative Popular Party opposition of "hooliganism" for suggesting the Socialists had hidden the extent of the financial problems of regions it lost to the PP in elections held last month.

The Socialists claimed the PP's claims amounted to political posturing as it prepared the way for drastic cuts in spending in the regions it now controls. These include for the first time Castilla La-Mancha, which the PP has claimed is bankrupt.

The outgoing administration in Castilla-La Mancha on Tuesday insisted on the transparency of the region's accounts and put its debt as of the end of April at ¤416 million, a fifth of the ¤2 billion the PP had claimed it was sitting on.

PP leader Mariano Rajoy on Monday called on the government to sit down with the opposition parties to "update" plans to reduce the regions' deficits. But Deputy Prime Minister Alfredo Pérez Rubalcaba accused Rajoy of having mounted an "irresponsible spectacle based on lies."

Meanwhile, Brussels reiterated its belief that the government's GDP growth targets for this year and the next of 1.3 and 2.3 percent respectively err on the side of optimism, adding that the administration should be ready to "adopt further measures in case budgetary and economic developments do not turn out as expected."

It also hinted that increases in value-added tax and levies on energy could be introduced to compensate for possible cuts in employers' social security contributions in order to lower labor costs.