Deficit targets subject to EC growth forecasts: minister

The Spanish government continues to adhere to the line that the deficit-reduction goals agreed with the European Commission are sacrosanct, but with the country on the brink of another deep recession it tacitly acknowledges, as explicitly stated by the IMF on Tuesday, that those targets are now unrealistic.

In an interview on Wednesday with state broadcaster TVE, when asked if the administration plans to renegotiate those targets, Economy Minister Luis de Guindos replied: "Not yet."

De Guindos said any modification to Spain's current Stability and Growth Program - which calls for a public deficit of 4.4 percent of GDP this year and three percent next year - would be agreed with Brussels based on the EC's revised GDP forecasts for Spain.

In its World Economic Outlook report released Tuesday, the IMF predicted the Spanish economy would contract by 1.7 percent this year and 0.3 percent next year. As a result, the multilateral agency estimates the deficit will fall to 6.8 percent this year from 8.0 percent last year and to 6.3 percent the following year.

"We need Brussels' economic growth projections, and at that moment we will begin negotiations with them from the point of view of Spain's stability program," De Guindos told TVE.

IMF officials on Tuesday hit home the idea that a dogmatic insistence on fiscal propriety when the economy is already ailing could be counterproductive, an argument De Guindos latched on to on Wednesday when he said Europe is changing its economic policy a "little bit." "Leaders are sensitive [to the need] to return to speaking of growth," he said.

Just a week after taking office at the end of last year, the Popular Party government announced spending cuts and tax hikes amounting to 15 billion euros after finding out the previous administration had overshot its deficit target of six percent of GDP by two full points. To meet the 4.4 percent official target for this year would involve a further 40 billion euros in belt-tightening measures that would exacerbate the erosion in economic growth.

"Cuts, in the short term, have a negative impact [on growth] but inspire confidence," De Guindos said, insisting it was important for the government to stick to the deficit target agreed with Brussels in order not to alarm the markets.

However, the head of the IMF's fiscal affairs department, Carlo Cottarelli, said on Tuesday that although it was essential for countries such as Spain and Italy to get their financial houses back in shape, the markets also get worried when there is no growth.

In response to the IMFs forecasts, De Guindos said: "Like all of us [they] they get it wrong now and again."