European Union budget enforcer Olli Rehn signaled he might seek to ease Spain’s targets for cutting its budget deficit in a retreat from the demands that helped drive the economy into recession.
EU officials will make a decision on the best pace for Spain’s budget consolidation when they deliver a scheduled assessment of the program in February, Rehn said at a press conference in Madrid yesterday.
“If there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path,” said Rehn, the EU’s economic and monetary affairs commissioner, as he sat alongside Spanish Economy Minister Luis de Guindos. “That’s what we did last year in the case of Spain.”
Spain’s economic contraction accelerated in the final three months of last year as the austerity program dictated by European officials bit into domestic demand and destroyed 850,000 jobs during Prime Minister Mariano Rajoy’s first year in office. That program will need to be intensified if Spain is to meet its target for this year, the Bank of Spain said in a report last week.
The yield on Spain’s 10-year benchmark bond fell six basis points to 5.19 percent at 1:30 p.m. in Madrid, compared with a euro-area high of 7.75 percent in July, before the European Central Bank’s president Mario Draghi pledged to backstop the euro area’s fourth-largest economy.
The government probably missed its goal of lowering the budget gap to 6.3 percent of gross domestic product in 2012, Budget Minister Cristobal Montoro signaled last month. This year’s target is 4.5 percent. Montoro declined to give guidance on the final 2012 figure today.
“I hope it will be good,” he said at a press conference in Madrid. “We have to remain confident.”
Spanish tax revenue rose 4.2 percent to 168.6 billion euros last year even as the economy shrank, Montoro said. GDP probably fell 0.6 percent in the fourth quarter, twice the pace of contraction in the previous three months, according to the Bank of Spain’s monthly report.
The National Statistics Institute will publish the first official estimate of fourth-quarter output tomorrow. Meanwhile, the Social Security Ministry today said payments to the country’s 9 million pensioners rose 4.8 percent from a year ago to 7.65 billion euros ($10 billion) in January.
Rehn, who yesterday declined to comment on Rajoy’s decision not to sever the link between payments and inflation at the end of last year, said Dec. 18 Spain should rein in the growth of costs related to its aging population.
“It is important that there is an appropriate and growth-friendly mix of expenditure cuts and tax increases,” Rehn said. He said he couldn’t confirm the 2012 budget gap exceeded 7 percent, and said the EU will update its assessment on Feb. 22.
Rajoy is seeking to avoid a full bailout as a slump in Spain enters its fifth year, undermining efforts to meet EU targets. The European Central Bank’s pledge to provide support to nations struggling has brought down borrowing costs, easing the pressure on Rajoy.
“The question now is how much budget consolidation should Spain do in order to be available to finance itself correctly and to stimulate the economic recovery,” Montoro said. “Now is not the moment to comment on what that might be.”