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EU Sees Spain’s Budget Measures Failing to Tackle Deficit

November 07, 2012

Spain’s budget deficit will be more than double the target set by the European Union in 2014 as a deepening recession blows Prime Minister Mariano Rajoy’s government off course, European Commission forecasts show.

Spain’s budget gap will amount to 6.4 percent of gross domestic product in 2014, compared with a target set by the EU of 2.8 percent, as “fiscal consolidation hardly advanced in the first eight months of 2012,” the European Commission said today in Brussels.

Rajoy yesterday said the country’s funding difficulties may force him to apply for European Central Bank aid to lower borrowing costs months after securing as much as 100 billion euros ($128 billion) in loans for Spain’s banks. Even so, Rajoy said he hopes to cancel tax increases in 2014 and pledged not to extend a temporary cut in civil servants’ wages next year.

The temporary nature of some of the tax increases and spending cuts taken by Rajoy will widen Spain’s deficit in 2014, the Commission said. It predicted shortfalls of 8 percent this year and 6 percent in 2013, up from May forecasts of 6.4 percent and 6.3 percent, respectively.

‘Substantiate Measures’

European Economic and Monetary Affairs Commissioner Olli Rehn called on Spain to spell out how it will meet deficit- reduction targets, telling reporters in Brussels today that he’d asked Spanish officials “to substantiate their measures of fiscal consolidation soon, also for 2014.”

Spain’s performance will be judged by its “structural fiscal effort, not only as nominal headline targets,” Rehn said, adding that the Commission is assessing whether Spain has taken “effective action” to bring down the 2012 and 2013 deficits.

The yield on Spain’s 10-year benchmark bond rose four basis points to 5.70 percent at 4:34 p.m. in Madrid, compared with a euro-era high of 7.75 percent on July 25, a day after Spain signed the conditions for bank aid. It has dropped 150 basis points since the ECB on Aug. 2 pledged to buy sovereign debt of countries requesting aid and committing to austerity measures.

Reordering Finances

ECB President Mario Draghi said today “fiscal consolidation is progressing well in most countries,” even as the “economic and financial situation in the euro area remains challenging.”

European leaders decided in July to give Spain an extra year to bring the deficit below the EU limit of 3 percent of GDP. They set looser targets of 6.3 percent of output for this year, 4.5 percent next year and 2.8 percent in 2014.

Overspending in Spain rose to 9.4 percent in 2011, behind Ireland and the same as in Greece, as the euro area’s fourth- largest economy relapsed into a recession. The second recession since 2009 offset measures implemented by Rajoy and by his Socialist predecessor.

“In 2014, the expiry of some of the measures introduced in 2012, such as the income-tax hike, is roughly offsetting the planned consolidation included in the 2013-14 budget plan,” the European Union’s executive arm wrote in its report.

Spain’s “risks are tilted to the downside,” the Commission said. With “high interest rates” and “considerable strain” on financing conditions, Spain’s public debt is likely to surge to 97.1 percent of GDP by 2014, from 92.7 percent next year, it said.

Junk Risk

On the brink of a junk credit rating, Spain has forecast gross debt issuance needs of at least 207 billion euros next year, up from 192 billion planned for 2012. The Budget Ministry this week confirmed the Treasury’s plan to continue raising funds for the semi-autonomous regions that need it next year. This year, the central government organized two bailout packages for the regions to help them pay suppliers and meet debt redemptions.

The Commission said GDP will contract 1.4 percent next year, compared with a forecast of a 0.3 percent contraction for 2013 six months ago. It said the economy will grow 0.8 percent in 2014, confirming Rajoy’s forecast of a recovery after 2013. Unemployment will peak at 26.6 percent in 2013, the report said, while Spain predicts it’ll fall next year. Joblessness rose to a quarter of the workforce in the third quarter, the most since at least 1976 and an EU record.

In power since last year, Rajoy has planned austerity measures amounting to 150 billion euros, or 15 percent of the nation’s annual GDP, by the end of 2014 to meet EU budget pledges. While Rajoy has already reduced unemployment benefits, Bank of Spain Governor Luis Maria Linde last month said Spain will miss its deficit goal unless the prime minister abandons another election pledge and changes rules linking pensions to inflation.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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