Austerity drive needs to hit top gear as think-tank predicts big blowout in deficit

Spanish think-tank Funcas believes Spain will substantially miss its deficit-reduction target for this year, possibly forcing the incoming administration of Prime Minister Mariano Rajoy to more than double the already drastic spending cuts he announced earlier this week.

Speaking at a seminar on Wednesday, Funcas director Ángel Laborda said based on central government and Social Security budget figures for the first 11 months of the year, the shortfall in the government's finances this year is expected to come in at eight percent of GDP, a full two percentage points more than the government's target.

The research department of Spanish bank BBVA estimates the deficit for all of the public administrations this year at 6.5 percent of GDP, while Intermoney is predicting a figure of seven percent.

Speaking at the investiture debate on Monday, Rajoy said that, assuming the outgoing Socialist government meets its six-percent deficit target for this year, budget savings of a further 16.5 billion euros will be needed to meet the target for 2012, which is 4.4 percent of GDP.

One percentage point of GDP is about 10 billion euros. Therefore, if the deficit exceeds the target for this year by two percentage points, cuts of a further 20 billion euros on top of the 16.5 billion mentioned by Rajoy would be required to meet the goal for next year.

Rajoy's said his austerity drive will focus on reducing spending. However, the now ruling Popular Party's secretary general, María Dolores de Cospedal recently did not rule out the need for tax hikes to meet the deficit target, depending on the state of the country's finances at the end of this year.

Laborda said the main culprit for missing this year's target would be the country's regions, which in the first nine months of the year posted a deficit of 1.2 percent of GDP, compared with their full-year target of 1.3 percent. The regions have already stepped up their austerity drive, slashing spending on the big budget items of education and health. Catalonia on Tuesday unveiled a draconian budget for next year that involves a one-euro surcharge on prescription drugs and a tax on tourists.

Earlier this month, Moody's Investors Service predicted the regions would miss their deficit target for this year by almost a full percentage point.

Moody's argued that a large part of the regions' outlays takes place at the end of the year. It pointed out that while their deficit at the end of the third quarter in 2010 was 1.2 percent of GDP, the figure at the end of the year reached 2.8 percent.

The Economy Ministry said Wednesday that the central government's deficit in the first 11 months of the year fell by 4.9 percent from the same period a year earlier to 52.4 billion euros, equivalent to 4.84 percent of GDP, slightly above the government's target for the full-year of 4.8 percent. The secretary of state for finance, Juan Manual López Carbajo, insisted the 4.8-percent goal would be met, and could even be slightly below that figure.

The Social Security system saw its surplus for the period January-November shrink by 41.8 percent from a year earlier to 6.457 billion euros, equivalent to 0.60 percent, compared with one percent a year earlier.

The government's projections for the deficit target for this year include a surplus of one percent. However, the institution needs to make an extraordinary payment of 855 million this month to compensate those on minimum state pensions for the loss of purchasing power as a result of the government's failure to hit its inflation target for the year. This is likely to mean that the Social Security system's budget will be in equilibrium or post a slight deficit for the full year for the first time since 1999 when it ceased to fund the national healthcare system.

The incoming government's task of reining in the deficit is likely to be more arduous because of the downturn in the economy, which will erode tax revenues. Experts believe growth will be negative in the last quarter of the year, and will continue to be so in the first half of next year.