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By Sonya Dowsett
BARCELONA (Reuters) - A stand-off between Spanish Prime Minister Mariano Rajoy and Catalonia, one of the country's wealthiest regions, risks the central government losing control of regional finances as Madrid seeks a softening of deficit targets from Brussels.
Catalonia, which accounts for around a fifth of Spain's economy, has yet to present a 2013 budget to parliament and wants more control over the collection of its taxes.
Catalan Economy Minister Andreu Mas-Colell told Reuters the region would not impose 4.8 billion euros (4.1 billion pounds) of spending cuts needed to reach a 2013 deficit target of 0.7 percent of its economic output.
"There is only so much a population can take," he said.
Rajoy is acutely aware of heightened separatist sentiment in Catalonia at a time of brutal spending cuts to health and education and squeezing the region further can only galvanise support for independence.
Yet tightening control over the spending of Spain's 17 regional governments is key to the country achieving budget deficits imposed by Brussels. Catalonia missed its 2012 deficit target by half a percentage point.
The government has given itself the power to take over regional authorities that fail to meet budget requirements but this would be seen as a call to arms in fiercely independent Catalonia, with its own language and distinctive culture.
Catalan President Artur Mas has already pledged to forge ahead with plans for a referendum on independence in 2014, a move Madrid has deemed illegal.
Brussels is widely expected to give Spain more leeway on its 4.5 percent budget deficit for 2013, and Madrid has said it will pass on any leniency to the regions.
Catalonia has pushed through 2.1 billion euros of cuts over the last two years in an attempt to whittle down debt in line with European demands and is waiting for Madrid to soften targets once Brussels agrees to cut it some slack.
"We are working on a budget, but we are going to wait until the matter of the target is settled to present it," said Mas-Colell.
Anger at slashed budgets for hospitals, schools and social welfare has revived the independence movement in Catalonia and November elections handed the majority of power to parties that want a referendum on secession from Spain.
Both Mas's CiU party and its parliamentary ally, separatists ERC, see greater power for Catalonia to collect its own taxes as a stepping stone towards independence.
"We are adamant that we want greater control over our tax receipts," Mas-Colell said. "We want to have more power over our own resources."
The system by which regional governments collect and receive taxes expires this year after a five-year cycle and the government has created a working group to assess how it might be changed.
Catalonia is a net contributor to the Spanish state, being the third biggest collector of taxes but only 10th in line when it comes to central government hand-outs. The region directly collects just 5 percent of its taxes, it says.
But analysts and investors say it is the wrong time to give more financial independence to regions whose overspending was a big factor in Spain widely missing its 2011 deficit target, which pushed it to the fore of the euro zone debt crisis.
"There is a clear indication that as far as market forces are concerned, what is favoured right now is a more stringent central government oversight," said Gilles Moec, analyst at Deutsche Bank.
Most of the regions have been shut out of the markets for months and depend on a fund set up by the central government last year to meet debt obligations and pay bills to suppliers like pharmaceutical companies for their health services.
Catalonia drew down 9 billion euros last year from the liquidity fund, known as FLA by its initials in Spanish, and a similar credit line for this year has already been arranged, Mas-Colell told Reuters.
Catalan leader Mas met PM Rajoy in Madrid at the end of March to talk about deficit targets and the tax collection model. But Mas-Collel said Rajoy had given no indication he would give the region greater fiscal autonomy.
"There is not a scintilla of a proposal on the table," he said.
Some in Catalonia fear the independence movement has diverted energies from tackling its dire finances. Debt has ballooned fivefold over the past 10 years to 51 billion euros in 2012, around a quarter of the region's economic output.
Interest payments alone on the debt hit 1.7 billion euros last year and are forecast to top 2 billion euros in 2013.
"Instead of Artur Mas going to Brussels to lobby for independence I would like to see him going there to explain how the deficit limits imposed by Europe are impeding economic growth and will lead to disaster," Pere Navarro, leader of the Catalan Socialist Party told Reuters.
(Reporting By Sonya Dowsett, editing by Mike Peacock)