Spain Fiscal


Spain misses 2012 deficit target

On 27 February, Prime Minister Mariano Rajoy announced to congress that the fiscal deficit reached 6.7% of GDP in 2012. The figure is broadly in line with the estimate given on 20 February at the State of the Nation debate and is down markedly from the 9.4% of GDP deficit recorded in 2011. Nevertheless, despite the improvement, Spain missed the 6.3% target agreed to with the European Commission.

As agreed with European authorities, the 6.7% figure does not take into account public aid injected into the financial sector. Taking into consideration the aid to recapitalize banks, the fiscal deficit actually rose to 9.99% of GDP, according to data released by the Ministry of Finance and Public Administrations a day after Rajoy's announcement.

Against this backdrop, European Commissioner for Economic and Monetary Affairs, Olli Rehn, commented that Rajoy must convince European Union officials that he can stabilize the country's public finances before being granted additional time in order to meet the budget targets agreed with European authorities. Spain already gained extra time in July last year, when the European Commission softened its deficit target to 6.3% of GDP for 2012 (from the previous 5.3%) and to 4.5% of GDP this year (previously: 3.0%), before narrowing it to 2.8% of GDP in 2014. FocusEconomics Consensus Forecast panellists expect the government to miss its target again this year with a projected fiscal deficit of 5.9% of GDP, which is unchanged from last month's forecast. For 2014, panellists see the fiscal deficit narrowing only to 4.8% of GDP.

Ever since the end of the real estate bubble in 2008, Spain has missed its fiscal targets, culminating in a 11.2% of GDP deficit in 2009. As a result, public debt has mushroomed from 36.3% of GDP in 2007 to 85.5% of GDP in 2012. Many economists consider the 90% of debt-to-GDP ratio as a critical threshold after which debt levels become unsustainable. According to this month's Consensus, Spain will pass this threshold in 2013, with debt reaching 92.6% of GDP.

Markets, however, are currently more concerned over the political uncertainty in Italy in the wake of the general elections than over Spain's fiscal position. Following the announcement of the budget figures, the yield on Spain's 10-year bond closed the day at 5.27%, which was only 19 basis points above the result recorded on 25 February, before the results of the Italian elections were known. FocusEconomics panellists expect the 10-year bond yield to end the year at 4.99% before moderating further to 4.83% in 2014.


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Spain Fiscal Chart

Spain Fiscal February 2013

Note: Annual public debt and fiscal balance as percentage of GDP.
Source: National Statistical Institute (INE) and FocusEconomics Consensus Forecast.

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