Brussels to talk with Spain on new budget deficit target

After acknowledging the Spanish economy would slip back into recession this year, the European Commission on Thursday left the door open to easing the country’s deficit target for 2012.

The EC expects the Spanish economy to contract one percent this year, but warned that the outlook could worsen due to the need for further austerity measures.

“Taking into account additional fiscal measures in the forthcoming budget may significantly change the picture,” the EC said in its interim report on the growth prospects for European Union member countries.

Spain wants to run a deficit for this year of slightly over five percent of GDP, compared with the target previously agreed with Brussels of 4.4 percent.

At a news conference to present the report, the European commissioner for economic affairs, Olli Rehn, said that once the EU statistics office has released its public deficit estimates in April, “We [will] work with the Spanish authorities and decisions will be taken once we have a full picture.

“I expect the Spanish authorities to share all relevant information on the outcome of last year’s budget, and the reasons for fiscal slippages, as well as their preparations for the budget for this year in order to ensure the structural sustainability of public finances in Spain, in line with the stability and growth pact,” Rehn added.

Prime Minister Mariano Rajoy reiterated his government’s firm commitment to meeting the fiscal goals.

“The only thing I can say is that we will talk with the Commission, but in any case, Spain will comply with its targets for the public deficit,” the conservative leader said.

The 4.4-percent target was based on Brussels’ previous forecast for Spain’s GDP growth of 0.7 percent. The deficit for last year was an estimated 8 percent, two full percentage points above target.

In a report released Thursday, the Commission estimated the Spanish economy would now shrink by one percent. The Bank of Spain and the IMF had previously predicted contractions in output of 1.5 and 1.7 percent respectively.

The PP government has said it will use the EC’s growth forecast to draw up the state budget for this year. The 4.4-percent target would oblige the government to find further budget savings in the order of 25 billion euros, aggravating the recession.

Rajoy on Thursday gave some clues to the content of the budget when he said austerity was a conviction of his government and not something imposed by Brussels. “We will continue to reduce the deficit,” he said. “We cannot spend above our possibilities for ever.”

The PP leader said the draft budget, which the government intends to present on March 30, would be “sensible and reasonable.” “Serious government cannot think in the short term,” he added.

In its report, Brussels said the ailing property sector and high unemployment (over a quarter of the workforce is out of a job) will continue to weigh on activity this year.

An expected recession in the euro zone will also hit Spanish exports, which have been one of the few bright spots in the Spanish economy. Brussels expects output in the single-currency area to contract by 0.3 percent, down from a forecast in the fall of growth of 1.4 percent.

“The weaker outlook for the euro area and still-high uncertainty, especially in relation to the sovereign-debt crisis, are expected to have an adverse effect on growth in 2012,” the EC said.

Brussels sees the biggest contraction in activity taking place in the first half, particularly at the start of the year before a slight improvement emerges culminating in zero growth toward the end of the year. Persistently high unemployment and high levels of household debt will continue to depress consumer spending.