• Shortfall hit 5.2% in 2015 against EU-set target of 4.2%
  • Commission reiterates concerns about Spanish fiscal record

Caretaker Prime Minister Mariano Rajoy, who made his record on the economy the focus of his re-election bid in Spain last year, is struggling to retain his credibility.

With his rivals negotiating to oust him from office, Rajoy faces the prospect of Spain being subjected to unprecedented European Union sanctions over its budget deficit, and his budget chief told reporters Thursday the prime minister had issued an estimate for the 2015 shortfall last month without consulting the team running the public accounts.

Rajoy, now heading an acting People’s Party government, told investors and his EU partners the deficit would be 4.5 percent of gross domestic product. Instead it was 5.2 percent, data released Thursday showed. That meant Spain missed the 4.2 percent deficit target it was set for last year by the European Commission by about 10 billion euros ($11 billion), even as the European Central Bank’s asset-purchase plan reduced funding costs to a record low and economic growth accelerated to the fastest since 2007.

“It undermines Rajoy’s narrative of the PP being the best economic managers,” Antonio Barroso, a political analyst at Teneo Intelligence in London, said by phone. “It also provides ammunition for the rest of the parties,” with new elections possible in June. 

Spain has been subject to the commission’s excessive-deficit procedure since 2009, after its finances came under intense pressure at the start of the euro crisis. Though the premier has cut the budget gap by almost half since coming to power at the end of 2011, he’s persistently missed targets even as the recovery has gained momentum.

Rajoy had pledged that the tax cuts he introduced in the run-up to December’s vote wouldn’t mean Spain breaching its fiscal commitments. Budget Minister Cristobal Montoro explained away the difference between Rajoy’s 4.5 percent deficit forecast and the actual shortfall at a news conference in Madrid by saying that the prime minister was making “a generic reference” to the deficit figure. “He said that without any information from this ministry,” Montoro told reporters.

“Montoro’s comments were probably aimed at massaging the negative news, blaming the missed target on overspending by regions and one-off charges,” Barroso said.

The shortfall last year was 56.6 billion euros, according to Budget Ministry figures.

‘Full Assessment’

EU Economic Affairs Commissioner Pierre Moscovici said the new data “confirm the commission’s concerns about Spain’s budgetary trajectory.” He reiterated that the commission would “make a full assessment” of Spain’s budget situation in May as planned.

Still, the commissioner, who warned last month that Spain might need to take additional fiscal steps, said in a statement that he welcomes “measures announced by the Spanish authorities to contain budgetary slippages in 2016, in particular at the regional level.”

No euro-area member has ever faced punitive measures over deficits, though the rules allow for the possibility of financial sanctions.

The Rajoy administration has repeatedly rejected further austerity, and it can point to data showing that Spanish growth last year of 3.2 percent was more than double the average of the euro region as oil prices fell by almost half. The expansion has helped to reduce the unemployment rate to 20.9 percent, the lowest since June 2011, though still more than twice the European average, according to government data.

‘Good Example’

“Spain is a good example of economic recovery,” Montoro said. “We specially need the growth due to our levels of unemployment.”

For 2016, the EU’s executive arm sees Spain breaching its target again, with a deficit of 3.6 percent instead of the agreed 2.8 percent. The shortfall would decline to less than 3 percent of its gross domestic product in 2017, according to commission estimates, which it would allow it to exit the deficit procedure.

“This is flagrant proof of the failure of the current government to comply with its key mission of keeping the accounts under control,” Javier Diaz Gimenez, a Madrid-based economics professor at IESE Business School, said of Thursday’s data. “It puts Spain in a very difficult situation in terms of its credibility with its European partners and the markets.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE