Spain, mired in political deadlock just as it emerges from a six-year recession, has admitted it will overshoot its budget deficit target next year.
The finance ministry said it informed the European Commission that it provisionally forecast its budget deficit at 3.6% of gross domestic product (GDP) from a previous 3.1% target.
It noted a backdrop of political instability after two inconclusive elections inside a year and eight years trying to haul itself back into shape following the 2008 economic crisis.
Two months ago, Madrid just avoided an EU fine for repeated breaches of budget rules.
Brussels let both Spain and neighbouring Portugal off the hook, judging that both were trying to get their house in order and close in on the official ceiling of 3.0% of GDP.
But the EU told both countries to stay on a path of “fiscal consolidation” as the only way to create a foundation for durable growth.
Brussels did not immediately comment on the latest forecast for the eurozone’s fourth largest economy.
After six years in recession, Spain reported a 2015 budget deficit of 5.1% of GDP, way off the 4.2% target set by the Commission.
For this year, Madrid must pare the deficit to 4.6%, and then 3.1% in 2017 – which it will now miss – then 2.2% in 2018.
Vote of confidence
Conservative Prime Minister Mariano Rajoy is clinging on to power after his Popular Party retained its status as the largest party. His failure to win a majority has left Spain effectively rudderless, hampering attempts to finesse spending plans which could underpin a cautious economic upsurge.
The budget report, seen by AFP, recognises that government plans to bolster revenue, including tax hikes for companies which it hopes can net €8 billion, will not suffice.
Growth is also fraying at the edges with the government now forecasting 2.9% for this year – down from a central bank forecast of 3.2%. For now, Spain is sticking with the bank’s 2017 prediction of 2.3 percent.
The economic crisis wrought havoc with the job market, Spain’s traditional weakspot, with unemployment peaking at 27% before falling back.
Madrid now sees the jobless rate falling from 19.7% to 17.8% next year, still well above the eurozone average of 10.1%.
All eyes are now on whether the political weather will clear as a divided opposition Socialist Party debates whether to abstain in a parliamentary vote of confidence to allow Rajoy to form a new government, the alternative being a third election in a year come December.
The Socialists are to debate their strategy on 23 October before the expiry of a 31 October deadline to form a new government or hold fresh polls.
In 2013, Spain received three extra years to cut its deficit below the mandatory 3% of GDP of the pact.
Despite the fact that this was the third time Madrid had been granted leeway since 2009, the deficit reached 5.1% of GDP in 2015, higher than previously announced.
The European Commission's latest forecast predicts that the Spanish deficit will be 3.9% of GDP this year and 3.1% in 2017.
In April, the executive and the ECB concluded that the needed progress on fiscal consolidation in Spain "has come to a halt, with part of the structural adjustment implemented in earlier years being reversed".
Following the elections on 4 October, a three-party coalition led by the Socialist Party came to power in Portugal. The new government failed to submit its draft budget for 2016 by 15 October, as the EU’s fiscal rules said, and sent the draft proposal only on 22 January 2016.
After assessing the first draft, the Commission concluded that the budget was “in clear breach of the Stability and Growth Pact”, and requested more measures.
Portugal has been in the corrective arm of the Stability and Growth Pact since December 2009 and was asked to bring the deficit to below 3% of GDP by 2015. For 2016, the Council recommended that Portugal should make a structural effort of 0.6% of GDP.
- 15 October: deadline for member states to submit their draft budgets for 2017.
- Mid-November: Commission expected to come up with an assessment of the draft budgets and the decision on the suspension of EU funds.
- 8 December: Spain and Portugal's deadline to submit the fiscal adjustments requested by the Council.