Guindos Ditches Pledge on Spain Deficit to Push Growth

  • Finance chief swore tax cuts wouldn't derail deficit reduction
  • EU sees Spain missing budget goals for 2015 and 2016

Spanish finance chief Luis de Guindos ditched his promise to meet European Union budget goals saying shoring up economic growth is more important for his country’s future.

De Guindos said worrying about whether the budget deficit comes in a few tenths of a percentage point above the country’s 4.2 percent target for 2015 would be a distraction from the fundamental challenge of protecting the economic recovery.

“What is important is to maintain the pace of growth of the Spanish economy,” he told reporters on Thursday before meeting euro-area finance ministers for the first time since December’s general election left the parliament divided between four major parties.

“The biggest risk for budget policy is that the Spanish economy slows down,” de Guindos added.

Spain risks being drawn into a clash with the European Commission which has been warning since October that the spending plans acting Prime Minister Mariano Rajoy pushed through ahead of the election don’t do enough to curb the currency union’s biggest budget shortfall. Eurogroup chief Jeroen Dijsselbloem, who saw off a challenge from de Guindos to hang on to his job last year, said this month that Spain won’t be allowed any more flexibility over its target, according to El Pais newspaper.

Speaking to reporters on Thursday, Dijsselbloem said Brussels would “wait for the outcome of the domestic political process,” before taking further action.

Deficit Struggles

European officials are struggling to hold national governments to their budget commitments as the urgency of the financial crisis recedes and the European Central Bank bathes the continent in practically free credit. Dijsselbloem, who is also Dutch finance minister, on Jan. 12 said France must comply with the EU rules after already getting two extensions and criticized Italy for asking for too much flexibility. 

In the run up to Spain’s election, de Guindos repeatedly said that the tax cuts Rajoy introduced as he battled to save his government wouldn’t jeopardize efforts to re-balance the public finances. The Commission forecast a deficit shortfall of 4.7 percent for 2015 compared with a 4.2 percent goal. This year the shortfall will be 3.6 percent while the target is 2.8 percent, according to officials in Brussels.

Now the acting economy minister is changing tack, arguing that the focus should be on the Spanish economy which is growing at around 3.5 percent. He said the fourth quarter will be at least as good as the third, when output expanded 0.8 percent.

Meanwhile officials in Madrid are stuck in a political deadlock after Rajoy lost his parliamentary majority at the polls. With no allies in parliament, the prospects of a left-wing alternative coalition are rising and that could lead to further budget clashes with the commission.

(Corrects to remove inaccurate reference to budget timing in seventh paragraph.)
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