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Spain debt cap to allow overspend in lean years

Source: Reuters - Wed 24th Aug 2011

Spain will retain leeway to overspend in years of slow growth under a debt cap to be enshrined in its constitution, its economy minister said, affirming it would hit key deficit reduction goals over the next two years.

Battling to shore up market confidence in its deficit reduction programme in the face of a fiscal crisis threatening to engulf the euro zone, Spain said on Tuesday it would set in stone a binding cap on public debt before elections in November.

That will mark only the second amendment to a constitution written in 1978 after the end of Francisco Franco's dictatorship.

The move follows calls by Germany - which already operates under a 'debt brake' law - and France for countries immersed in the debt turmoil to set obligatory limits on deficits to help regain the trust of investors.

But minister Elena Salgado said on Wednesday the constitutional amendment would echo Spain's existing budget law, which imposes no budget deficit or only a very small one only in years of "normal" economic growth of between 2 and 3%.

"This ... will allow us to have resources to stimulate the economy when there are problems," she said in a radio interview.

"We must determine at what point in the economic cycle we are, and that will determine whether we can go into deficit... When there's a crisis the budget will be allowed to register a negative".

Spain's public sector deficit is at the heart of concerns it could eventually need a bailout like Greece, and it has pledged to cut the gap to 3% of GDP by the end of 2013, in line with EU guidelines.

The euro zone's growth and stability pact also recommends that countries run public debt of not more than 60% of GDP, while critics say laws imposing limits on borrowing restricts a state's flexibility on spending during recessions.

Salgado said it was not reasonable to put an absolute number, or percentage, on the limit on public debt in the constitution, but reiterated the deficit targets up to and including 2013 would be met.

Spain's constitutional amendment takes it part of the way down the path trod by Germany, which has capped new government borrowing at 0.35% of GDP from 2016 and enshrined limits on its "structural" deficit - allowing for fluctuations in the growth cycle - in its constitution.

France is looking to take similar steps.

FIGHTING SYMPTOMS, NOT THE CAUSE ?

Spain's current budget law did not prevent its budget deficit swelling to 11.1% of GDP in 2009.

But one analyst said the country's economic problems, unlike Greece's, were not related to government overspending but to the effects of that year's property sector collapse, which led to at best anaemic economic growth.

"In my view the problems were not due to misbehaviour (by)... the government - just that the real estate market was in a bubble and that led to a large rise in the budget deficit," said Martin van Vliet of ING.

"They are trying to fight the symptoms rather than the underlying causes of the problem."

Spain's public debt reached 62.8% of GDP in 2010, broadly in line with most euro states and far below the levels of around 100% or more in Greece, Italy, Ireland and others.

Almost 40 billion euros in bond-buying by the European Central Bank has eased borrowing costs for Spain and Italy, but analysts say the euro zone crisis has further to run given policymakers' reluctance to embrace deeper fiscal union.

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