April 26, 2013 7:08 pm

Spain plans to delay budget deficit reduction and ease austerity

Spain admitted on Friday that it would need two extra years to bring its budget deficit back below the EU limit of 3 per cent of gross domestic product, a relaxation of its austerity targets that won tacit approval from Brussels.

Cristóbal Montoro, the budget minister, said on Friday that Madrid’s plans for reducing the deficit were “compatible” with the need for economic recovery.

The delay reflects the continuing weakness of the credit-starved Spanish economy, which is set to shrink by another 1.3 per cent this year before returning to modest growth in 2014. Government finances have been hit hard by the bursting of Spain’s debt-fuelled housing bubble, which led to a surge in unemployment and forced Madrid to nationalise a string of troubled banks.

But Spain’s plan for a more gradual reduction in its deficit also highlights a backlash among policy makers in the eurozone periphery, where there is growing reluctance to follow Germany’s austerity-first approach to fighting the economic crisis.

Mariano Rajoy, the Spanish prime minister, last year repeatedly slashed spending and raised taxes in an attempt to avert a collapse in public finances. More recently, however, senior government officials have stressed the need for a more gradual approach to fiscal consolidation, a stance increasingly supported in Brussels.

Madrid’s plan to give itself another two years to meet the EU deficit target not only takes away the need for deep spending cuts but also removes pressure to adopt measures such as an increase in value added tax – a step that Spanish ministers were at pains to rule out on Friday.

Mr Montoro said the budget deficit would reach 6.3 per cent this year, up from an initial target of 4.5 per cent. The shortfall would then decline gradually over the next two years to 2.7 per cent in 2016. A spokesman for the European Commission – which enforces the deficit rules – said Spain’s forecasts were “consistent” with the current technical analysis done by Brussels, but added that the commission’s final verdict would only come next month.

The government on Friday also confirmed that it was sharply lowering its growth forecast for the coming years, and was now expecting a fall in output of 1.3 per cent in 2013 and growth of 0.5 per cent next year. Spain had originally forecast a drop in GDP this year of only 0.5 per cent.

“The problem is that in Spain, with this small increase in growth, you are not going to bring down unemployment,” said Ignacio Conde-Ruiz, an economist at Fedea, a Madrid-based think-tank. “Typically you need to grow at least 1.5 per cent a year in order to increase employment.”

The government expects growth to reach only 1.3 per cent in 2016, and forecasts unemployment of close to 25 per cent even three years from now. On Thursday, Spain’s national statistic office revealed that unemployment rose beyond 27 per cent for the first time since records began. More than 6m Spaniards are out of work, in a population of 47m.

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