Through heavy social spending and investments in major building projects, Spain is one country whose regional authorities have been living beyond their means and racking up large budget deficits. Those gaps were sustainable during boom times, but in the current economic climate, they threaten to push Spain toward a financial reckoning that could have consequences far beyond its borders.
Regional overspending is likely to cause the central government in Madrid to miss its target of bringing the nation’s overall deficit down to 6% of gross domestic product this year, considered crucial to maintain investor confidence. For that reduction to happen, Spain’s 17 regional governments were told to post budget shortfalls amounting to no more than 1.3% of GDP, but they almost reached that level after just the first six months of the year.
“If the regions surpass their deficit limits, then they can send Spain as a whole off course,” said Ismael Sanz, an analyst at King Juan Carlos University in Madrid.