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Pain again

21 October 2011 By Fiona Maharg-Bravo

The odds of Spain missing its 6 percent fiscal target this year have increased with the country’s finances hit by the double whammy of profligate regions and slowing growth. The electoral cycle isn’t helping. A minor slippage wouldn’t be too worrying, but anything more than a percentage point will make next year’s goals hard to reach.

Elena Salgado, Spain’s economy minister, still insists the government can meet its target. But it has been over-optimistic on this year’s growth projection of 1.3 percent, only admitting recently that it might be lower. The consensus is at 0.8 percent – with risks to the downside given ongoing turmoil in the euro zone and all signs pointing to a stalled economy in the third quarter.

What’s more, even if the central government is fiercely committed to its targets, the regions are a different story. The final deficit number may come in at about twice the official 1.3 percent deficit target for the regions. Spain’s electoral cycle has not helped. Regions did put off tough adjustment plans until after the regional elections last May. Most are postponing their presentation of next year’s budgets to after the November parliamentary elections.

Some slippage is expected. Forecasts by international bodies predict a deficit of 6.1-to-6.3 percent this year.

Salgado says the sale of radio spectrum will bring in an extra 1.8 billion euros this year, and debt service costs could be 2 billion euros lower than budgeted. These add up to about 0.4 percent of GDP. The government has also said any losses in the government’s bank bailout fund – which would have increased the deficit – will now be borne by the deposit guarantee fund, financed by the banking sector.

But these are not sustainable improvements to the structural deficit. A hike in VAT rates, and more spending cuts at the regional level, look inevitable. Some economists are penciling in deficits of up to 8 percent. Such a large gap would make next year’s target of 4.4 percent all the more daunting. Spain’s next government, which will take over before Christmas, will have very little time to make big changes. Spain’s real pain is yet to come.


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