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Categorized | Economy

Spain deficit fight suffers setback

Posted on March 31, 2016

Spanish acting Prime Minister Mariano Rajoy looks on before holding a meeting of the Popular Party parliamentary group at the Spanish Parliament in Madrid on February 4, 2016. Rajoy has struggled to form a government as other parties consistently refused to support him, citing inequalities created by drastic spending cuts implemented during his four-year term, as well as corruption scandals afflicting the PP. AFP PHOTO / JAVIER SORIANOJAVIER SORIANO/AFP/Getty Images©AFP

Mariano Rajoy, Spain’s acting prme minister

Spain has veered sharply off course in its long-running effort to reduce the budget deficit, unveiling a 5.2 per cent shortfall in 2015 that is likely to raise alarm inside the European Commission and impose significant political constraints on the next Spanish government.

Cristóbal Montoro, the budget minister, said the funding gap stood at €55.8bn last year — significantly worse than predicted by either the Spanish government or the Commission. The shortfall is almost a full percentage point above the deficit target set by Brussels, which has warned repeatedly in recent months about the state of Spain’s public finances.

    Crucially, the gap also makes it all but impossible for Madrid to comply with its target of reducing the shortfall to below 3 per cent of gross domestic product this year — an objective that senior Spanish officials insisted until recently was well within reach. To meet the Brussels budget objective for this year, the next government would have to cut spending by at least €20bn.

    Pierre Moscovici, the EU’s economic and financial affairs commissioner, said in a statement: “The data published today confirm the commission’s concerns about Spain’s budgetary trajectory.”

    Mr Montoro blamed the latest budget deviation on overspending by Spain’s powerful regional governments, many of which are now controlled by the leftwing opposition. But he also drew attention to the overall improvement in Spain’s economic performance, and to the fact that the government had again managed to lower the deficit — even if by less than originally hoped for.

    “Our legacy is an economy that is growing and that is once again creating jobs,” he told a press conference in Madrid on Thursday.

    Analysts were less kind in their assessment, saying the government itself had made the deficit worse, not least by cutting taxes ahead of last year’s general election. “The government relaxed its stance because we had an election year — and the European Commission looked the other way. This was very bad fiscal policy,” said José Ignacio Conde-Ruiz, a professor of economy at the Complutense University in Madrid.

    Prof Conde-Ruiz said Spain’s yawning budget gap had come about despite the overall buoyancy of the Spanish economy. Helped by a revival in domestic demand and record tourism receipts, GDP grew by 3.2 per cent last year, one of the fastest rates of expansion in the eurozone. “This is proof that Spain’s fiscal crisis is far from solved. And it means that the next government will have a very tough start. These numbers means that many of the parties’ election promises have become totally unrealistic,” he said.

    Spain has been without a proper government since the election in December, when voters failed to hand a clear majority to either the political left or the right. Party leaders have since struggled to forge a workable government, amid growing speculation that Spain is now on course for a repeat election in June. Mariano Rajoy, prime minister, will continue to serve as de facto leader until fresh elections are called, but his government lacks the constitutional and parliamentary power to push through fresh budget measures.

    All the main Spanish parties, including Mr Rajoy’s Popular party, have promised to strike a new deal with Brussels that would give Madrid more time to bring the public deficit into line. In addition, both the opposition Socialists and the anti-austerity Podemos party have vowed to raise spending on social measures, education and other areas.