Spain targets slower deficit cut to preserve growth

[MADRID] Spain's caretaker government on Tuesday said it aimed to cut the public deficit this year and next at a slower pace than originally agreed with Brussels, after a wide miss on 2015 targets left it scrambling to plug a budget gap.

Madrid wants to whittle down the deficit to 3.6 per cent of economic output in 2016 from a previous target of 2.8 per cent, which would have met the 3 per cent threshold recommended by the European Commission.

It projects that goal will now only be reached in 2017, with a deficit at 2.9 per cent of gross domestic product instead of the 1.4 per cent previously forecast.

The acting centre-right government - in place since an inconclusive national election in December left parties short of a majority and unable to agree on a coalition - said sticking to the original targets could hurt an economic recovery. "It would have required a very significant budget adjustment," acting Economy Minister Luis de Guindos told parliament.

He confirmed Spain was lowering its annual growth forecasts for 2016 to 2.7 per cent from 3 per cent previously, and citing a slowdown in the world economy. "The new budget plan is in line with the situation we had at the end of 2015 and will allow us to reduce the deficit without putting the pace of growth at risk," he said.

In spite of spending cuts by the previous People's Party (PP) administration and a rebound over the past two years after a prolonged recession, Spain has struggled to bring its public deficit in line with Brussels' demands.

Tax cuts brought in months before the December election partly contributed to a wide deficit miss last year.

Spanish regions, which manage their own budgets in areas such as education and healthcare, also overspent, driving the deficit to 5 per cent of gross domestic product rather than the 4.2 per cent target agreed with the European Commission.

In a joint statement with the European Central Bank, the Commission warned on Tuesday that Spain's efforts to cut the deficit, one of the highest in the euro zone, had dwindled.

"The needed progress on fiscal consolidation has come to a halt, with part of the structural adjustment implemented in earlier years being reversed," they said.

Further reforms were needed to rebalance the economy, they added, in a country still suffering from one of the highest unemployment rates in Europe, at 20 per cent of the workforce.

The political stalemate has stifled momentum for further structural changes this year, however, and the prospect of fresh elections at the end of June if parties cannot agree on a government this month would suppose more delays.

Brussels has yet to formally sign off on the new deficit goals envisaged by Madrid.

Spain's acting government has also tweaked forecasts for its public debt to GDP ratios, elevating the 2016 target to 99.1 per cent of output from 98.5 per cent previously, and the 2017 goal to 99.0 per cent from 96.5 per cent.

REUTERS