Bank of Spain says deficit target for this year may be missed

The governor of the Bank of Spain, Luis María Linde, on Thursday said that based on the execution of the budget for this year, the government faces the risk of failing to meet its deficit target for this year.

In an appearance before the congressional committee on the economy, Linde said the administration should ready itself to implement additional measures to ensure it meets the deficit target agreed with the European Commission for this year of 6.3 percent of GDP. That figure does not include the losses deriving from state aid to banks.

The budget deficit of the central government and Social Security system for the first eight months of this year was already over the target for the full year of 4.5 percent of GDP, coming in at 4.77 percent. The target for the regions, which were largely responsible for Spain failing to meet its goal for last year, is 1.5 percent.

“The reduction of the deficit from the highs reached in 2009 is proving anything other than easy,” Linde said. “The information available shows that there are risks of failing to meet the target for this year. Given the importance of fulfilling it additional measures should be considered that make this possible as allowed for in the Budget Stability Law.”

It is fundamental to maintain a prudent projection for public revenues”

The governor called for mechanisms to allow the early detection of deviations from budget projections and proposed that the regions, like the central government, should publish budget execution reports on a monthly basis. He also suggested that recalcitrant regions should be fined.

The government’s task is compounded by the fact that the economy has slipped back into recession and is expected to contract 1.5 percent this year.

Linde said the biggest deterioration in the state of public finances has been on the revenue side. “It is fundamental to maintain a prudent projection for public revenues,” he said. He described the government’s forecast of a contraction in GDP for next year of 0.5 percent as “certainly optimistic,” pointing to the fact that some experts estimate the fall in output next year could be in the region of 1.5 percent.

Linde said cutting the budget deficit by 1.8 percentage points to 4.5 percent would be “very difficult in full recession, but necessary.” He also described the projected unemployment rate of 25 percent for 2013 as “dramatic.”

Bloomberg on Thursday also quoted two people familiar with the issue in the European Commission as saying that the economic assumptions underpinning Spain’s plan to cut its budget deficit from 6.3 percent this year to 4.5 percent are excessively optimistic.

The European Union’s commissioner for economic and monetary policy, Olli Rehn, delivered that preliminary assessment to Spanish Economy Minister Luis de Guindos at a meeting in Madrid on Tuesday of this week, said the two people, who declined to be named because the talks were not public.