Spain 2012 Deficit Slippage Looms as Recession Deepens

Spain will struggle to meet its 2012 deficit target as a contracting economy hinders the impact of the deepest budget cuts in the nation’s democratic history, Deputy Budget Minister Marta Fernandez Curras said.

“It will be difficult, but who says it’s impossible?” Curras told reporters in Madrid yesterday evening after Budget Ministry data showed the central-government’s shortfall through November was 4.37 percent of gross domestic product.

Curras said the social security system, combining Spain’s tax-funded pensions and unemployment insurance, is expected to register a gap of around 1 percent of output in 2012. The central government and social security together have a full-year deficit goal of 4.5 percent.

For now, Prime Minister Mariano Rajoy’s government has ruled out seeking European aid to curb a surge in borrowing costs while acknowledging Spain may miss its deficit target. The Brussels-based European Commission suspended its budget-cut prescriptions for the nation last month as the euro region sank into a recession.

No Need

Rajoy said on Dec. 14 that Spain hasn’t sought aid because it doesn’t need it. Spanish exports rose 8.7 percent in October from a year ago after gaining 0.5 percent the previous month, Economy Ministry data showed today. Spain’s trade deficit is down 28 percent over the first ten months of the year as declining labor costs helped make the nation’s products more competitive.

The yield on Spain’s 10-year benchmark bond rose three basis points to 5.26 percent at 1:24 p.m in Madrid, compared with a euro-era high of 7.75 percent on July 25, a day after Spain signed conditions for as much as 100 billion euros in European loans for its banks, and a day before European Central Bank President Mario Draghi pledged to defend the euro. The spread with similar German maturities widened five basis points to 3.86 percentage points.

The European Union has set Spain an overall deficit target of 6.3 percent of GDP for this year, after overspending swelled to 9.4 percent in 2011. That includes the balance from the 17 semi-autonomous regions, 8,000 municipalities and the Social Security.

Too Early

“The data are in line with the economic situation we are going through,” Curras said. “I myself would like to know today how much tax receipts will amount to at the end of the year, but it’s too early to say.” It’s difficult to forecast the deficit to the exact decimal place, she said.

Total tax receipts collected by the state in the first 11 months of 2012 rose 1.1 percent on a cash basis. The government increased income tax in February and value-added tax in September to slow a drop in revenue. The euro area’s fourth-largest economy is due to shrink for a sixth straight quarter in the three months through December.

Central government spending rose 0.1 percent on a cash basis, boosted by a 16.3 percent surge in interest payments to 25.5 billion euros and a 3.2 increase in transfers including social security funding and payments to the regions. Curras said an increase in revenue and a drop in spending should reduce the deficit this month.

Public Aid

While public aid to recapitalize the banking sector may be included in the deficit, Curras said it is a one-time item that won’t be taken into account by the European Commission to assess whether the nation is complying with the targets it has been set under a so-called “excessive deficit procedure.”

In a separate statement, the Social Security Ministry said the pensions system registered a surplus of 0.26 percent of GDP in the first 11 months, down from 0.60 percent a year earlier. The figure doesn’t include the balance from the unemployment-benefits system and the data are not comparable with Spain’s deficit target.

Rajoy said last week he couldn’t predict what the deficit will be this year. In a Bloomberg Survey of 18 estimates, economists see it at 7.55 percent of GDP, followed by 6 percent next year, again overshooting its EU target, set at 4.5 percent of output.

While unemployment is already the highest in the EU, above a quarter of the workforce, economists expect the recession to worsen to 1.5 percent in 2013, three times as much as the government’s official forecast, after 1.4 percent in 2012, according to 37 estimates.

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