The European Commission said Spain’s budget deficit, the widest in the European Union, will increase next year unless the government implements more austerity measures.
“Despite the return to positive, albeit weak, growth in 2014, the general government deficit is expected to widen to 7 percent of gross domestic product, as some of the measures introduced in 2012 would expire,” the commission said in a report released today in Brussels.
While the European Commission last week endorsed Prime Minister Mariano Rajoy’s request for two more years until 2016 to reorder Spain’s public finances, it will issue a full assessment of his plans on May 29. His Cabinet’s measures aim to focus on boosting growth to end a six-year slump in the euro region’s fourth-largest economy.
The commission said Spain’s economy will shrink 1.5 percent this year, more than previously forecast on Feb. 22, and grow 0.9 percent in 2014, more than predicted in February. The commission predicted a budget gap of 6.5 percent of GDP in 2013, from 10.6 percent last year. The shortfall will then widen in 2014 to 7 percent.
The government’s budget plan aims to shrink its shortfall to 6.3 percent of GDP this year from 10.6 percent last year, and to 5.5 percent in 2014. Excluding aid to recapitalize Spain’s banks, the shortfall was about 7 percent last year. The government has cut its growth estimates as it sees output contracting 1.3 percent this year before expanding 0.5 percent in 2014.
After implementing the toughest austerity measures in Spain’s democratic history, Rajoy ruled out another value-added tax increase or reduction in public wages even as he extended a temporary income-tax increase and announced environment-related levies.
International Monetary Fund Managing Director Christine Lagarde said she supported the plan, further encouraging officials in Brussels and Berlin to back away from austerity- first policies. The commission sees Spanish unemployment rising to 27 percent this year from 25 percent in 2012 before falling to 26.4 percent in 2014. The government predicts a peak of 27.1 percent this year.
The yield on Spain’s 10-year benchmark bond today fell below 4 percent for the first time since October 2010. That compares with a euro-era high of 7.75 percent in July before the European Central Bank pledged to defend the single currency. The ECB yesterday cut its benchmark lending rate to a record low 0.5 percent to try to spur the euro-region economy out of recession.
The commission cut its forecasts for Spain’s public debt burden, while predicting borrowing will top the euro-region average in 2014 for the first time in the currency’s history. Debt will surge to 91.3 percent of GDP at the end of the year from 84.2 percent in 2012 and to 96.8 percent next year, it said. That compares with previous forecasts of 95.8 percent of GDP for 2013 and 101 percent for 2014.
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