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No new austerity for Spain after ‘really big’ economic achievement

A man talks on his cell phone as people walk past in Madrid Feb. 28, 2013. The country’s public deficit was 6.7 per cent of gross domestic product (GDP) in 2012, below forecasts.


Spain said on Thursday it will not need new austerity measures this year after its public deficit beat forecasts of a deeper effect from prolonged recession.

The deficit was 6.7 per cent of gross domestic product (GDP) in 2012, the government said, missing a goal of 6.3 per cent but below European Commission and economists' forecasts of 7 per cent or higher.

"I insist that what we achieved is really big, important, really notable and it will help Spain and its regional governments recover their credibility," Treasury Minister Cristobal Montoro said at a news conference.

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Investors pushed debt premiums for the euro zone's fourth largest economy to a euro-era high last summer, before the European Central Bank promised to backstop troubled economies' bond markets, on concern Spain could not control its deficit.

Spain's public shortfall was 8.9 per cent in 2011, well above target and forcing the conservative government, which took power in December 2011, to pass over €60-billion ($78.4-billion U.S.) of unpopular tax hikes and spending cuts that will continue to take effect this year.

Including the one-off cost of rescuing the country's troubled banks – which equalled 3.25 per cent of GDP – the deficit was 9.99 per cent of GDP last year, Mr. Montoro said.

A cash injection late in the fourth quarter from a 3-percentage-point hike in value-added tax and changes to the corporate tax calendar helped the government reduce the deficit, according to preliminary figures.

Even as retail sales tanked and industry froze in December, data shows VAT receipts rose 176 per cent in that month, year on year, to €3.2-billion and corporate tax income rose 112 per cent to around €4.2-billion.

The December boost helped to shrink to under 7 per cent a 12-month deficit that at the end of October had stood at 9 per cent.

That rapid shrinkage has led some economists to calculate that future tax receipts were booked into 2012 income and payments delayed to boost the headline figure.

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While Spain is not expected to have broken any rules in its accounting, putting off payments could haunt the government in 2013, economists said.

"The figures are completely out of line with the current economic environment. It's only a few decimal places here and there due, I suspect, to some delayed payments to suppliers and the early declaration of some tax receipts," said an economist at a leading Spanish think tank, who preferred to remain unnamed until the full December details had been reported in mid-March.

"But, this is feast today, famine tomorrow. They're shifting all the problems to 2013."

Mr. Montoro said European Commission statistics agency Eurostat would not have any issues with Spain's public accounts.

Brussels has said it is satisfied with Prime Minister Mariano Rajoy's cuts and reforms and the European executive is expected to give Spain a second extension on shrinking the deficit to under 3 per cent, currently set for 2014.

Brussels' current forecast is for Spain's deficit to jump to 7.2 per cent next year as temporary tax hikes expire.

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It is still unclear how much relaxation Spain will get on its 2013 deficit target, which is now set at 4.5 per cent of GDP, but Mr. Montoro was confident the government would not have to announce new budget cutting measures.

"There is no reason at all to introduce new budget cutting measures this year," he said.

Spain's 17 autonomous regions were largely to blame for the country's high 2011 deficit, but Mr. Montoro said the regions all together came very close to meeting their target of a deficit equal to 1.5 per cent of GDP.

That showed the government has been successful in reining in the overspending regions, which will help convince Europe to ease demands, economist at Spanish bank BBVA Miguel Cardoso said.

"I think Spain, to have been able to reduce the deficit by two and half points in this recessive environment, has won a certain level of flexibility," Mr. Cardoso said.

"We think if the new target is around 6 per cent (for this year), more measures won't be necessary … what they need to do is specify what they plan to do from 2014."

Brussels has increasingly focused on members' structural deficits, which eliminates the effects of the recession.

The European Commission has calculated that Spain reduced its structural deficit last year by 1.4 per cent of GDP, well below a recommendation to cut it by 2.7 per cent of GDP.

Mr. Montoro, however, said the government had cut the structural deficit by almost 3.5 per cent of GDP last year but said Brussels must now look over the figures to see if it agrees.

The economy contracted 1.4 per cent last year, the second worst yearly slump since 1970, but the government expects growth, after more than almost two years in recession, by the third or fourth quarter.

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