Spain to sanction regions which run budget deficits

Jan 27, 2012, 14:14 GMT

Madrid - The Spanish government Friday approved draft legislation which will force administrations to meet their fiscal targets or face sanctions, in a move to restore market confidence in the crisis-hit country's solvency.

Central, regional or municipal administrations which do not stick to agreed spending limits can be fined, government representatives said as they unveiled the law.

Administrations can run budget deficits only in 'exceptional circumstances' from 2020 onwards, if the law is approved by parliament.

Until then, administrations are to observe deficit targets set by the European Union.

This year's limit for Spain is 4.4 per cent of gross domestic product. However, the government is weighing the possibility of trying to loosen it after the previous Socialist government missed the 2011 target of 6 per cent by about two percentage points.

Prime Minister Mariano Rajoy's conservative government, which took office in December, has announced spending cuts and tax hikes worth about 15 billion euros (19.5 billion dollars) in an attempt to trim the deficit.

The government also promised liquidity to cash-strapped regions which tighten their budget deficits.

The new law was a major 'structural reform' towards stabilizing the budget, Deputy Prime Minister Soraya Saenz de Santamaria said.

It is based on a constitutional amendment introduced in September. The reform made Spain the second EU country after Germany to constitutionally limit its budget deficit.