Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts
The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall increased in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid.
The fiscal and political consequences of demanding austerity in a shrinking economy highlight the dilemma facing Rajoy. To trigger a European financial lifeline, he may have to impose yet more cuts, repeating the pattern seen in Greece, Portugal and Ireland.
“There is no chance that Spain will hit its targets,” Megan Greene, director of European economics at Roubini Global Economics LLC, said in a telephone interview. “The deficit targets are economic suicide.’
Spanish bonds fell today, with the yield on the 5.85 percent January 2022 security rising 6 basis points to 5.77 percent at 2:40 p.m. in Madrid.
Rajoy, who meets French President Francois Hollande tomorrow in Paris, has introduced more than 100 billion euros ($130 billion) of tax increases and spending curbs amid a slump that is hollowing out his revenue base and pushing unemployment to 25 percent. The 57-year-old premier is also facing a secession threat from Catalonia, mounting popular protests and unrest from regions forced to rein in their own spending.
Rajoy last week pushed back expectations of a bailout, telling reporters no request was imminent. His deputy, Soraya Saenz de Santamaria, said the government needs to ensure a request for help from the European Stability Mechanism would be granted before it can call for aid. A bid to the ESM is needed to trigger support from the European Central Bank.
German Finance Minister Wolfgang Schaeuble yesterday told reporters before a meeting of euro-region finance ministers that Spain doesn’t need any more financial support after agreeing to as much as 100 billion euros in aid for its banks in June. Luxembourg’s Luc Frieden said Rajoy’s economic reforms are headed in the right direction.
Spain’s economy probably contracted for a fifth quarter between July and September, according to the central bank. Output won’t return to the 2008 level until at least 2017, the International Monetary Fund forecasts. As a result, the program of budget consolidation the EU first set out for Spain in 2009 is going backward.
“Even as you cut, the gap between spending and revenue collection keeps getting larger,” said Jonathan Tepper, a partner at research firm Variant Perception in London.
Last year, when the previous government was targeting a 6 percent shortfall, the budget exceeded the 2010 deficit of 9.3 percent after Budget Minister Cristobal Montoro added about 5 billion euros of losses from the bank bailout. Those costs -- which the EU treats as exceptional items -- will more than double this year when the goal is 6.3 percent, he said.
The IMF forecast Spain’s deficit will be 7 percent this year excluding the cost of bailing out the banks in its October outlook published late yesterday. Next year’s deficit will be 5.7 percent compared with a target of 4.5 percent, the fund said.
“What is important for the Spanish government is to continue with its reform program, to reduce the budget deficit, and then dissipate all the doubts about the future of the euro zone,” Economy Minister Luis de Guindos told reporters in Luxembourg today where he is meeting his European colleagues. “This is the fundamental issue.”
Government debt will leap 17 percentage points to 85 percent of GDP in 2012 as the state absorbs the cost of bailing out banks, the power system and public contractors. That will add at least 10 billion euros to Spain’s borrowing costs next year, offsetting the gain projected from the sales-tax increase.
“We’re on a completely unsustainable trend,” Dario Perkins, director of global economics at Lombard Street Research in London, said in a telephone interview. “The domestic economy has completely imploded.”
The first-half shortfall of 4.3 percent was 0.5 percentage points higher than the year-earlier period, according to Conde-Ruiz, an economic adviser to the previous Socialist administration, and Duke University economics professor Juan Rubio-Ramirez.
The second-half deficit has exceeded the first half’s by an average of 15 billion euros in the past four years, they said. The 2013 projections for the central government and the social-security system would see the deficit exceed by 12 percent the 35 billion-euro deficit budgeted for this year.
Montoro says budget cuts now taking effect will guarantee he meets his target. He dismissed his critics when he presented the budget to reporters in Madrid on Sept. 27.
“From where do they get these spending forecasts?” he asked. “At the end of the year we’ll be cutting back even more.”
Other policy makers number among the skeptics. Spain’s central bank governor Luis Maria Linde and Olli Rehn, the European commissioner in charge of deficit policing, sided with those questioning Montoro’s boldness and Linde urged him to consider more austerity.
The serial failures of Spain’s austerity program call into question the doctrine that the EU and the ECB are imposing on the struggling nations around the edge of the single currency area, economists such as Perkins say.
Under the German insistence that nations eliminate excessive borrowing as a condition of financial support, Greece is completing the fifth year of a recession that has knocked 17 percent off annual output.
“The sovereign debt crisis dampens economic development, that’s the case worldwide,” Schaeuble said in an Oct. 7 ZDF television interview. “The cause is excessive debt levels in all industrialized countries.”
Before the crisis burst Spain’s real-estate bubble, the country’s finances were in order. In 2007, it had a debt-to-GDP ratio of 36 percent and budget surplus of 1.9 percent.
For now, Tepper says the only way to head off a disaster in the euro area is for the ECB to get more aggressive -- a prospect already rejected by its president, Mario Draghi, as well as German leaders.
“It all depends on how much money the ECB wants to print,” Tepper said. “Spain and the other peripheral countries are looking at something similar to Greece if the ECB doesn’t monetize their debt.”
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