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Spain To Miss Deficit Target Again

by Ulrika Lomas,, Brussels

10 October 2012

Spain looks set to miss its budget deficit target again this year, despite a raft of austerity measures and a recent agreement with all 17 Spanish regions to rein in their own budget gaps.

Last year, the central government missed its deficit target of 6% of gross domestic product (GDP) by almost 3% as the government poured taxpayers' money into the failing banking sector, the regions continued to spend, and the shrinking economy failed to generate sufficient revenues. While the Conservative government of Prime Minister Mariano Rajoy, installed last December, has pledged tough medicine to deal with the crisis, a similar scenario looks likely to be played out in 2012.

According to the International Monetary Fund (IMF), the budget deficit will reach 7% of GDP this year and 5.7% next year, overshooting agreed targets of 6.3% and 4.5% respectively, as the government continues to recapitalize the banking sector. This in turn will push national debt to 90% of GDP in 2013.

The profligacy of Spain's regional governments has contributed substantially to the fiscal crisis. According to the IMF, two-thirds of the fiscal slippage that occurred in 2011 was attributable to regional governments, which did not adjust at all last year.

At the Fiscal Policy Council meeting of July 12, the central government initiated for several regions the first step in the warning procedure established in the new budget stability law. Regions will also begin monthly budgetary reporting from this month and a centralized fund was established to support regional financing.

Earlier this month, Rajoy managed to convince the regional governments to commit to cutting their deficits to 1.5% of GDP in 2012, then 0.7% of GDP for 2013, and 0.1% of GDP for the following years. However, the central government is facing pressure from some regions for a relaxation of regional deficit targets. Catalonia has been the most vocal in its opposition to the targets set out by the central government, arguing that the deficit reduction effort was not equally shared. It claims that a 2012 target of 1.5% of GDP for regional governments is too tough, especially when the central government is expecting a deficit of 7% of GDP this year.

With the medicine seemingly not working, the Spanish government unveiled last month its largest wave of austerity measures yet as the government battles to stave off the increasing likelihood that it will become the next eurozone country to require a bail-out.

Following a cabinet meeting on September 27, it was announced that budget measures for next year will seek to raise almost EUR40bn from public spending cuts and increased revenue. As a result, public sector pay is to be frozen for a third consecutive year, ministerial budgets will be slashed by almost 9% and an independent body will be created to monitor the government's budget performance.

Central to revenue-raising efforts in the latest budget will be a crack down on tax avoidance and the 'underground' economy. Among the measures contained in the bill are plans to limit the use of cash payments in excess of EUR2,500 involving entrepreneurs and professionals. Any breach of the limitation will result in an administrative penalty for both the payer and the buyer amounting to 25% of the value of the payment made in cash.

TAGS: tax | economics | tax avoidance | fiscal policy | public sector | gross domestic product (GDP) | budget | International Monetary Fund (IMF) | Spain

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