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Bank of Spain expects Rajoy to miss deficit target

Source: Bloomberg - Wed 21st Nov 2012
Bank of Spain expects Rajoy to miss deficit target

The Governor of the Bank of Spain, Luis Maria Linde, said the government risks missing its budget targets this year and next, adding to doubts on Mariano Rajoy's ability to cut the deficit amid a 5-year slump.

The data "doesn't allow us to rule out the possibility of some slippage," because the target depends on tax measures kicking in at the end of this year, Linde said in the Senate in Madrid today. "Meeting the 2013 objectives could be put in danger if tax collection was affected by lower economic activity."

Rajoy is trying to reduce the deficit by 2/3rds in 3 years even as he forecasts the economy will continue to contract next year amid a 26% unemployment rate. While the European Commission told Spain last week its budget measures were sufficient, Moody's Investors Service said the EU's stance was "credit negative" for Spain, which it rates one step above junk. Linde said the deficit targets should not be eased.

"It is crucial to dissipate doubts over the capacity to control the upward trend of public debt," Linde said.

Spain increased the rate of IVA from Sept. 1 as part of a package of measures announced in July to correct a 3 month-old budget. As part of the same package, it scrapped a Christmas bonus for public workers equivalent to a month's salary.

"Meeting the target will depend on numerous tax measures, with an impact in the last quarter ending up yielding the expected results, and that compensates for the expansion in spending on interest, jobless benefits and pensions," Linde said. "It should be expected that possible slippage in some areas can be offset with possible adjustments in others."

The 2013 budget, which seeks to cut the deficit to 4.5% of GDP, is making its way through the lower and upper houses of Parliament for final approval by the end of the year.