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Linde Says Spain May Miss Deficit Goal, Optimistic on Growth

Bank of Spain Governor Luis Maria Linde
Bank of Spain Governor Luis Maria Linde said, the growth forecast underpinning budget projections for 2013 are “optimistic.” Photographer: Roberto Garver/Bank of Spain via Bloomberg

Bank of Spain Governor Luis Maria Linde said the government risks missing its deficit goal this year, is overly optimistic about the economy in 2013 and faces a “serious” decision on increasing pension payouts.

“The information available -- for the central government through August -- shows there is a risk of missing the objective set for this year,” Linde said in testimony to the Spanish parliament’s budget committee in Madrid today. “Given the importance of achieving this, additional measures that would make it possible should be considered.”

Prime Minister Mariano Rajoy’s forecast for the economy to contract 0.5 percent is “optimistic” and may lead to further corrective budget measures if it’s overshot, Linde said.

Unsustainable borrowing costs may force Spain to request a second European bailout after securing as much as 100 billion euros ($129 billion) in loans for its banks. Rajoy is struggling to tackle the euro area’s third-largest budget deficit amid a deepening recession that has pushed the unemployment rate to 25 percent.

The government faces a “very serious” decision regarding pensions this year and it should weigh the impact of maintaining the buying power of retirees with the effect on the deficit in 2012 and in the following years, Linde said. “This is another risk that exists to comply with 6.3 percent this year.”

Spain has promised its euro-region partners it will limit its budget shortfall to 6.3 percent of gross domestic product this year, compared with 8.96 percent in 2011. The central government’s shortfall was 4.8 percent of GDP in the first eight months of the year. That’s more than the full-year target of 4.5 percent. The rest of the total deficit comes from the budget gaps of the regional governments, municipalities and the social-security system.

Restoring market confidence in the credibility of Spanish finances is crucial to return to growth in 2014, Linde said. “Basically our economy has a funding problem that comes from a problem of confidence,” Linde said. Overhauls of the economy should also aim to increase competitiveness, he said.

Budget plans must be made available for all levels of government at the same time, Linde said.

“We lack a document that would enable an analysis of all public administrations’ budget plans and their compatibility with targets,” he said.

The creation of a fiscal authority announced by the government last month will be useful provided the body is independent and has as much authority and resources as similar institutions in other countries.

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