Lagarde: Spain needs more time to cut public deficit

Given the poor state of its economy, Spain needs to be given more time to complete its program of fiscal consolidation, the International Monetary Fund’s managing director, Christine Lagarde, said on Thursday.

The European Commission is expected to decide later this month whether to extend the deadline for Spain to bring its public deficit back within the European Union ceiling of three percent of GDP

Spain “clearly needed to do fiscal consolidation but we don’t see the need to do upfront, heavy duty fiscal consolidation as was initially planned,” Lagarde told a news conference in Washington. “Spain needs more time and needs to be able to adjust [...] its fiscal consolidation efforts.”

The IMF earlier this week predicted that the Spanish economy would contract 1.6 percent this year after declining 1.4 percent last year. It also forecast the jobless rate will continue to rise from 25.0 percent last year to 27.0 percent this year, before easing slightly to 26.5 percent in 2014.

New forecasts

The government of Prime Minister Mariano Rajoy is due on April 26 to present Brussels with plans for another battery of reform measures along with its updated macroeconomic forecasts. The official forecast for GDP for this year is for a contraction of 0.5 percent, but that figure is expected to be revised to bring its more in line with that of the IMF and the EC, which is for a decline of 1.4 percent.

On the basis of that information, the Commission will decide whether or not to extend the timeframe for bringing the deficit down. Brussels has dropped strong hints that it will do so, but it is uncertain whether Spain will get one or two more years to hit the EU ceiling.

The public deficit ended last year at seven percent of GDP, missing the government’s target of 6.3 percent. The goal for this year is 4.5 percent and 2.8 percent for 2014.