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Spain on track to meet deficit target for year, finance minister says

October 23, 2012 El Pais
The central government reduced the public deficit in the first nine months of the year to 3.9 percent from 4.7 percent in the period January-August, putting the administration on course to meet its target for the full year, Finance Minister Cristóbal Montoro said Tuesday.

Montoro was speaking in Congress during the debate on the draft state budget for 2013. The full breakdown of the budget execution for the first nine months is due to be released next Tuesday, but the most likely explanation for the improvement is increased revenues deriving from the increase in the value-added tax at the start of September. Total revenues in September were up 15.7 percent from the same period a year earlier, with corporate tax collections up 4.1 percent and those for personal income tax up 2.9 percent.

“This means, if we include the strict compliance of the regions, that we are very close to meeting the deficit target we have marked out,” Montoro said.

The figures provided by Montoro are homogeneous – in other words, they do not include advance payments made to the financially stretched regions to improve their liquidity.

The official target for the deficit this year is 6.3 percent of GDP, which includes 4.5 percent for the central government, 1.5 percent for the regions, 0.3 percent for municipal governments and a zero deficit for the Social Security system.

However, the government revealed to the European Commission on Monday that the Social Security system is expected to post a record deficit of 1.0 percent this year because of higher-than-projected spending on unemployment and pension benefits. Montoro said a better-than-expected performance by the central government should offset the deficit of the Social Security system.

The European Union’s statistic office Eurostat on Monday revised its estimate for Spain’s deficit last year to 9.4 percent from 8.4 percent to reflect injections by the state in nationalized banks. Montoro had already flagged this, saying that as a result the actual target for the shortfall in the government’s books for this year would be 7.4 percent instead of 6.3 percent.

Eleven political groups have tabled complete amendments to the draft budget, largely on the basis that the forecasts underpinning it are unrealistic. However, the ruling Popular Party can use its absolute majority in Congress to push the budget through.

The main issue under question in the budget is the government’s forecast of a contraction in the economy next year of only 0.5 percent, when the IMF expects a figure of 1.3 percent. The agency also is predicting the government will fail to meet its deficit targets for this year and the next.

According to a survey of 19 analysts carried out by the think-tank Funcas, only one coincides with the government’s forecast of a contraction of 0.5 percent, with the majority closer to the IMF’s estimate.

The consensus estimate for GDP next year in Funcas’ survey is for a contraction of 1.5 percent, up from 1.1 percent in a survey carried out in July. The downward revision reflects reduced expectations for domestic demand, which is now expected to contract 3.8 percent. This will only be partly offset by an improved performance by the export sector.

For this year, the consensus estimate is for a contraction in GDP of 1.5 percent, in line with the government and the IMF’s forecasts.

In its latest monthly economic bulletin released Tuesday, the Bank of Spain estimated that output contracted 0.4 percent in the period July-September on a quarterly basis, in line with the fall in the second quarter. On an annual basis, the decline accelerated to 1.7 percent from 1.3 percent.

The central bank estimated the negative contribution to GDP of domestic demand eased to 1.2 percent in the quarter as consumers brought forward purchases to avoid the increase in VAT at the start of September. The export sector made a positive contribution to GDP growth of 0.8 percentage points.

Montoro defended the budget as the most socially-oriented since democracy was restored over 30 years ago. “For every 100 euros, 63 are set aside for social spending,” the minister said. “Never before has this been the case in a proposal by the government under democracy.”

The leader of the main opposition Socialist Party, Alfredo Pérez Rubalcaba, dismissed the draft budget as lacking in credibility and as unfair and accused the government of impoverishing the middle classes with the VAT hike.

“The budget is incredible and it’s going to bring more recession and unemployment,” the Socialist leader said, adding that “nobody shares the [growth] figure.”

“My advice to you is to go and do it over again because nobody believes it,” Rubalcaba added.

The Socialists’ congressional spokeswoman, Soraya Rodríguez, described the budget as “fiction.” “It’s not credible, it’s not realistic and it’s going to be changed,” she said. “It increases people’s suffering,” she added.

Along the same lines, the spokeswoman for the Galician BNG nationalist party, Olaia Fernández, said: “The government doesn’t hesitate in sacrificing people to save the banks,” in reference to a bailout of the banking system using funds granted by Spain’s European partners.