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Wary Brussels boosts Spainís deficit forecast to 3.5% of GDP for 2017

Source: El Pais - Mon 13th Feb 2017
Wary Brussels boosts Spainís deficit forecast to 3.5% of GDP for 2017

In the context of exceptional global uncertainty, the Spanish economy remains strong. In a report to be released today, the European Commission forecasts growth slightly above 2% for 2017 and 2018, and while highlighting the countryís ďsurprisingĒ expansion, detects signs of a slowdown. But Brussels is less optimistic about Spainís ability to meet its deficit-reduction requirements, forecasting a deficit equivalent to 3.5% of GDP for this year, four-tenths of a percentage point above the objective, and two-tenths higher the forecast of three months ago.

Europe also suspects Spain will rake in less revenue from its latest tax hikes, despite claims from Madrid this will be a record Ä202.6 billion in 2017. If Brussels is right, this will mean the government of Prime Minister Mariano Rajoy will have to impose extra cuts to the tune of Ä4.3 billion.

The report begins by noting that Spainís economic growth has exceeded expectations in recent quarters, but uses the word ďuncertaintyĒ more than 80 times over the course of its 200 pages, usually in the context of Brexit or US President Donald Trump.

However, Spain is no longer the biggest risk facing Europe: after a bumpy adjustment following the 2012 rescue, Spainís economy is growing above the EU average and creating jobs in the process. That said, the Spanish economy is still being held back by a huge debt and by a fragile fiscal situation that could prompt huge headaches if global risks generate instability and risk premiums start to rise again, the reportís authors state.

Brussels applauds Spainís economic performance, noting that 2016 saw a third consecutive year of growth, expanding at almost twice the EU average due to ďmore balancedĒ fundamentals, strong domestic demand, and exports that for the first time since the beginning of the recovery made a net contribution to growth. GDP growth will remain ďstrongĒ although it will tend to slow down, and the tail winds provided by lower oil prices, tax cuts, and improved financial conditions thanks to the European Central Bank, have subsided.

The Commission says it expects Spain to continue creating jobs, albeit at a slower rate than up until now, with unemployment falling to 17.7% this year, and down to 16% in 2018, predicting that salary growth and low productivity will put labor costs on a par with the EU average after several years of strong competitiveness.

Of greater concern to Brussels is the difference between the Spanish governmentís optimistic forecast of its deficit reduction and its own, which is four-tenths of a percentage point lower, at 3.5% of GDP for this year and 2.9% for 2018. The consequences could be important.

The 2017 deficit is particularly worrying: if Brussels is right, Spainís deficit will be four-tenths of a percentage point above the 3.1% of GDP objective.

When Brussels forecast a deficit equivalent to 3.3% of GDP in January, it warned the government it should be ready to take additional measures if it failed to meet its targets. Those four-tenths of a percentage point would translate into further cuts of Ä4.3 million achieved through reduced public spending and higher taxes.

Brussels is less optimistic about Spainís ongoing GDP growth, and particularly about tax revenue. Despite his electoral promises, Prime Minister Mariano Rajoy has planned hikes on company tax, alcohol, tobacco and social security contributions. But Brussels believes that Spain will still not collect enough revenue and says that this will have a direct impact on the governmentís ability to meet its debt reduction commitments, highlighting the potential losses from the cost of the bank bailout and efforts to protect the banking systemís assets.

The Commission says nothing about the difficulties Rajoyís minority government will face in approving its budgets, but it is worth noting that Spainís structural deficit worsened in 2016 and will only improve slightly this year, stabilizing in 2018. To put it simply, Spain will not be able to put its public accounts in order even with 3% growth. Furthermore, the public debt will increase slightly this year and stabilize at around 100% of GDP. External debt, public and private, is very high. If the road ahead really does get rocky and the markets once again cause trouble, Spain could face further problems.

Recommended Reading :

* Brussels chides Spain over subsidies for harmful fossil fuels

* Spain promises Brussels it will make more cuts if deficit balloons

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