EU Urges Spain to Rein in Pension Costs to Protect Budget

Spain should rein in the growth of costs related to its aging population, the European Union said, increasing pressure on Prime Minister Mariano Rajoy who has sought to protect pensioners from austerity measures.

Public pension spending will exceed the European average until 2060, even after an overhaul approved by the previous government, the EU said today in its fiscal sustainability report. Assuming no policy changes, Spain’s debt burden would rise to 114 percent of gross domestic product in 2020 and 129 percent in 2030, from 97 percent in 2014 and 36 percent in 2007, it said.

“In Spain, the risk of fiscal stress has been reduced thanks to the consolidation measures adopted in the past one or two years, but it still remains rather elevated,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters today in Brussels. “It is essential that Spain will effectively implement the budget for 2013 that includes a substantial amount of fiscal consolidation.”

According to today’s report, which covers the 24 EU nations not in full bailout programs, short-term “risks for fiscal stress have abated in nearly all countries” since a previous sustainability report in 2009. While the 2009 report indicated that almost two-thirds of EU nations had “elevated risks of fiscal stress for 2010,” today’s report said only Spain and Cyprus “appear to be still at risk” in the short term.

Public Finances

For Spain, “further containing age-related expenditure growth appears necessary to contribute to the sustainability of public finances in the long term,” the European Commission, the EU executive in Brussels, said in the report.

Spain’s Rajoy pledged in July to review pension rules as part of a set of budget cuts announced after he agreed to a European bank bailout. While cutting benefits and public wages and raising taxes, the government has tried to shield retirees from austerity as it increased pensions this year and raided the country’s welfare-reserve fund to pay for benefits.

Still, the government said on Nov. 30 that it was scrapping a law that obliged it to compensate pensioners for higher-than- expected inflation. Pensions rose 1 percent this year, compared with an annual inflation rate of 3 percent in November. Next year, pensions will rise another 1 percent, with retirees on less than 1,000 euros ($1,317) per month receiving a 2 percent increase.

‘High Risk’

Cyprus, which in June became the fifth euro-area nation to seek international aid, “appears to be at high risk of fiscal stress in the short-term, originating from both the macrofinancial and fiscal side of the economy,” the EU said in the report. In the long term, Cyprus should rein in age-related spending, including through pension reform, to help ensure sustainable public finances, the EU said in the report. Without policy changes, Cypriot government debt would increase to 102.7 percent of economic output in 2014 and to more than 127 percent in 2020, the EU warned.

In the case of Italy, the “country does not face a risk of fiscal stress in the short term” as the budget deficit is under the EU limit and the pension system has already been overhauled to address the ageing population. Reducing the euro area’s second-biggest debt is Italy’s largest challenge, according to the report.

Primary Surplus

The government forecasts that its primary surplus, the government balance excluding interest payments, will reach 5 percent of GDP by 2014, allowing a reduction in total borrowing, which is forecast to total 126.5 percent of GDP that year. Maintaining that 5 percent primary surplus will be challenging, given the country’s track record and historically low economic growth, the EU said in the report.

“This result is therefore conditional upon the very high structural primary surplus forecasted for 2014 -- 5% of GDP -- being maintained after that year,” the EU said. “Such a structural primary surplus is considerably higher than what has been observed historically for Italy -- 2.6 percent of GDP on average over the last 15 years.”

While France does not appear to face a risk of fiscal stress in the short term, the EU said there are “some indications that the fiscal side of the economy continues to pose potential challenges.” French Finance Minister Pierre Moscovici said on Dec. 14 that his government’s “clear” economic strategy rests on maintaining credibility on its budget and competitiveness to keep borrowing costs low.

‘Favorable Conditions’

In a separate report, the commission said Germany and the Netherlands will be key in the euro area’s effort to cut current-account imbalances. “Favorable conditions for adjustment in current-account surpluses are in place in most, albeit not all, surplus countries,” it said.

“From the euro-area perspective, the developments in two major surplus countries will be decisive. While Germany is reducing its surplus, subdued domestic demand and deleveraging pressures combined with tightening policy measures exert upward pressure on the Dutch surplus,” according to the report.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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

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