Bank of Spain chief warns that deficit targets could be missed

The governor of the Bank of Spain, Luis María Linde, on Wednesday warned that the government may miss its deficit-reduction targets for this year and the next, insisting that there are no signs yet of a recovery in the domestic economy.

The government is looking to cut the structural shortfall in its finances to 6.3 percent of GDP this year and to 4.5 percent in 2013. It has projected a contraction in GDP this year of 1.5 percent and 0.5 percent in 2013. Both the IMF and the European Commission estimate the fall in output next year is likely to be triple the government’s forecast.

“On the information available, the possibility of slippage (in 2012) can still not be ruled out,” Linde said in testimony to the Senate’s budget committee. The governor said meeting the target will depend on tax measures, such as the hike in the value-added tax generating sufficient revenues to offset the increase in debt-servicing and unemployment and pension costs.

Finance Minister Cristóbal Montoro said Wednesday the central government’s budget deficit in the first 10 months of the year in homogeneous terms was 3.92 percent of GDP, up from 3.90 percent in the first nine months. The target for the full year is 4.5 percent of GDP.

The European Commission said last week that the budget measures introduced by the government for this year and the next were sufficient.

“The (deficit) figures for the past two months are heading in the right direction, but I don’t want to say anything more than that,” Linde said. “It doesn’t seem impossible to me that we will achieve the target this year.”

However, the governor said if the government compensates pensioners for the loss of spending power as a result of inflation coming in above forecast, there will have to be savings elsewhere. Inflation is currently running at 3.5 percent, compared with the official forecast of 1 percent, meaning the government will have to find a further 5 billion euros to top up state pensions.

Speaking later in the Senate, the secretary of state for the budget, Marta Fernández Curras, said there was “room” to compensate retirees for the loss of purchasing power.

For next year, Linde said the key to meeting the deficit target lay in the economy generating sufficient revenues. “Achievement of the targets set for 2013 may be jeopardized if tax receipts are affected by lower economic activity,” he said.

The central bank chief said there were still no signs of the so-called “green shoots” of recovery that some government officials have perceived.

“The ongoing adjustment of the Spanish economy is at a delicate juncture since there are no perceptible improvements in activity and job creation,” the governor said. Linde said it would take time for the structural measures introduced by the government to make themselves felt.

Labor Minister Fátima Báñez said last month that Spain was “emerging from its crisis” but did not elaborate on what that optimism was based, while Fernández Curras on Wednesday said although the economic figures available for the fourth quarter remain negative, they are less so than the previous quarter and better than expected.

“The figures show that what we are doing is having an effect,” Fernández Curras said.