Brussels asks Spain for more fiscal adjustment to meet deficit obligations

The European Commission on Friday warned Spain that it risks failing to meet its deficit-reduction targets for the next three years, and as such “invited” the government to introduce further fiscal-adjustment measures.

In a report on the budget plans for European Union member countries, Brussels calculated that the government needs to introduce further budget measures worth 35 billion euros over the next three years to meet its obligation under the Stability and Growth Pact (SGP) to bring the shortfall in its finances back within the EU ceiling of 3 percent of GDP.

The government has imposed a series of painful tax hikes and spending cuts since May 2010 but these have failed to make sufficient inroads into the persistently high deficit.

Brussels believes the conservative Popular Party government of Prime Minister Mariano Rajoy has taken the measures needed to meet its budget target this year of 6.5 percent of GDP, down from 10.6 percent in 2010, a figure that includes the loan the country took own to recapitalize its banks.

However, it said the draft budget for next year runs the “risk of not complying with the rules of the SGP.” Spain is required to trim its deficit to 5.8 percent of GDP in 2014 when the government expects the economy to grow 0.7 percent. The report goes on to say that the improvement in Spain’s structural deficit “falls short of the efforts recommended by the European Council, especially for 2014.”

The document extends the fears expressed about next year into 2015 when Spain is required to trim its deficit to 4.2 percent of GDP and 2016 when the shortfall has been set at 2.8 of GDP. Brussels gave Spain an additional two years to meet its obligations under the SGP.

The Commission calculates that Spain needs to introduce fiscal-adjustment measures equivalent to 2 percent of GDP next year to lower its structural deficit, while the draft budget highlights efforts amounting to only 1.75 percent. The difference of 0.25 points is equivalent to 2.5 billion euros. Brussels expects the structural gap to be 2 percentage points of GDP in 2015 and 1.25 points in 2016.

Brussels did not suggest what sort of adjustments the government needed to take, confining itself to “inviting” the Spanish authorities “to take the necessary measures within the national budgetary to ensure that the 2014 budget will be fully compliant with the SGP and notably to address the risks identified by the Commission.”