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Spain: Spain includes fiscal deficit limit in the Constitution

August 31, 2011

On 23 August, Spain's ruling Socialist government pushed through a constitutional reform to include a fiscal deficit cap, with the support of the opposition People's Party (PP, Partido Popular). The lower house approved the bill on 2 September with the three-fifths minimum support required to change the constitution and it should be ratified by the Senate by 7 September. The reform follows similar initiatives in other European countries. Germany included such a deficit rule in its constitution in 2009, and France and Italy have draft legislation in the works. The amendment will prevent the central government, as well as regional authorities, from having a structural deficit above the levels set by the European Union. In addition, all public administrations will be legally forced to comply with the budget cap, and the central as well as the regional governments will need to be authorised by law to issue public debt. This amendment, will allow for larger deficits only in cases of extraordinary emergencies or deep recessions. An additional law included in the reform will set a deficit ceiling of 0.4% of GDP from 2020 onwards. The hasty move, which should be completed before parliament is dissolved in the run-up to the 20 November elections, is the Spanish's government's latest attempt to reassure markets of Spain's commitment to honour its debt payments and to reduce its risk premium. Spain's risk premium peaked at 6.32% on 2 August, before the European Central Bank launched a massive bond purchase programme on 7 August to ease pressures on Spain and Italy, but had dropped to 5.03% by 31 August. Spain is seeking to slash the public deficit to 6.0% of GDP this year from 9.2% of GDP in 2010. The government aims to reach the EU-target of 3.0% of GDP by 2013. Consensus Forecast panellists expect the government to overshoot this year's fiscal balance target and see the deficit reaching 6.5% of GDP this year before narrowing to 5.2% of GDP in 2012.


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