Spain Raises 2012 Budget Deficit Goals for State, Welfare

Spain raised its 2012 budget-deficit targets for the central government and the welfare system amid a worsening recession and the rising cost of regional bailouts.

The goal for the state and the social-security system combined is 4.5 percent of gross domestic product, according to a presentation sent to the European Commission that the Budget Ministry posted on its website. Under previous targets for this year, social security was to be balanced, while the state forecast a deficit of 3.5 percent.

The latest figures contradict Deputy Budget Minister Marta Fernandez Curras’s July 31 statement that 2012 targets remained unchanged to leave room for maneuver amid “uncertainty.”

Prime Minister Mariano Rajoy has vowed to tackle the euro area’s third-largest budget gap even as the recession deepens. Spain’s overall goal for all levels of spending -- the central government, the regions, the cities plus the welfare system -- remains 6.3 percent of GDP.

Euro-area finance ministers agreed last month to postpone for a year the deadline for Spain to bring its budget shortfall back within the European Union limit of 3 percent of GDP. The new targets for all levels of government were set at 6.3 percent in 2012 instead of 5.3 percent; 4.5 percent next year rather than 3 percent; and 2.8 percent in 2014.

Regional Bailouts

The Budget Ministry document shows a combined budget- deficit goal for the state and social security of 3.8 percent in 2013 and 2.7 percent in 2014, without providing any breakdown. That compares with a previous goal for the state alone of 2.5 percent in 2013 and 1.9 percent in 2014, while the social security was to remain balanced through 2014.

Central government overspending deepened to 4 percent of GDP in the first half as it bailed out administrative units including the regions and the social security system. Over the same period, interest costs to service Spain’s debt rose 32.6 percent from a year ago.

Companies’ debt with the social security has increased by more than 1 billion euros to 7.1 billion euros in the past two years, a Labor Ministry official, who asked not to be named in line with government policy, said today.

Spain will take additional adjustment measures this year if risks of budget slippage persist, according to the document sent to Brussels. Economy Minister Luis de Guindos said on Aug. 5 that Spain won’t introduce more spending cuts or tax increases because it’s on target to meet its deficit-reduction goals.

Bond Yields

Expectations of European Central Bank intervention to lower Spain’s borrowing costs have tempered a drop in Spanish debt. The yield on Spain’s 10-year benchmark bond was at 6.89 percent at 5:13 p.m. in Madrid, compared with a euro-era intraday high of 7.75 percent on July 25, a day after the government signed off on as much as 100 billion euros of loans for Spain’s banks.

Rajoy’s government expects 10-year borrowing costs to rise to an average 6.4 percent this year from 5.4 percent last year and then fall to 5 percent in 2013 and 4.5 percent in 2014, according to the forecasts sent to Brussels. On April 27, the forecasts were 5.4 percent this year, 4.7 percent next year and 4.2 percent in 2014.

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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