PUBLIC FINANCES

Social Security to book record deficit this year due to recession

Reality kicks in as Brussels revises Spain’s overshoot upward for 2010 and 2011

The government of Prime Minister Mariano Rajoy on Monday had no other option than to admit to Brussels what experts have been saying for some time: that its projection of a zero deficit for the Social Security system is overly ambitious.

With only two months until the close of the year, unemployment and pension benefits are now expected to cause a record shortfall in the Social Security's books of 10.5 billion euros, equivalent to about one percent of GDP.

When the government presented its state budget for this year in March, many experts said at the time that the figures did not add up. The impact of the recession on Social Security's finances was one of the arguments used by the European Commission to relax Spain's deficit target for this year to 5.3 percent of GDP from 6.3 percent.

the European Union’s statistics office, Eurostat, on Monday said it had revised Spain’s public deficit for last year upward from 8.5 percent of GDP to 9.4 percent to reflect state injections of capital into nationalized banks.

That put Spain on a par with Greece and only behind Ireland, whose shortfall was 13.4 percent of GDP, in the EU. In contrast the average deficit in the EU fell to 4.4 percent of GDP, down from 6.5 percent in 2010, while the shortfall in the euro zone declined to 4.1 percent from 6.2 percent. Seven countries in the EU had deficits above the bloc’s ceiling of 3 percent of GDP.

Eurostat also revised the deficit for Spain for 2010 upward from 9.3 percent to 9.7 percent to reflect unpaid bills by the public administrations. “The increase in the deficit for 2010 is mainly due to the previously unrecorded unpaid bills in the state and local government sub-sectors,” Eurostat said. “The increase in the deficit for 2011 is mainly due to the reclassification of capital injections by the central government in Catalunya Caixa Bank, NCG Bank and Unnim Bank.”

Not until 2017

Finance Minister Cristóbal Montoro in September flagged that as a result of including the bank capitalizations, the government’s actual deficit target for this year would be 7.4 percent instead of the 6.3 percent agreed with Brussels.

However, given the weak state of the Spanish economy, which is expected to contract 1.5 percent this year and 1.3 percent next year, the IMF has thrown doubt on the government’s ability to meet its deficit-reduction target for this year and the following, which is 4.5 percent of GDP. The IMF believes Spain will not be able to meet the three-percent target until 2017, although the government has pledged to do so by 2014.

Eurostat also revised Spain’s outstanding public debt to 61.5 percent of GDP in 2010 in 2010 and to 69.3 percent last year from 68.5 percent previously. However, that still left Spain below the average of 82.5 percent in the EU and 87.3 percent in the euro zone and below Germany and France, with 80.5 percent and 86.0 percent.

There were 14 EU countries with debt levels above the blocs ceiling of 60 percent of GDP, with Greece topping the table with 170.6 percent and followed by Italy with 120.7 percent.

Average government spending in the euro zone last year was 49.5 percent of GDP and average public revenues 45.4 percent, compared with figures for Spain of 45.2 percent and 35.7 percent.

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