Spanish Central Bank Warns on Spending

Spain's central bank told the government on Tuesday (16 June) there is no room for further spending measures above those already announced, and warned that the country's rising budget deficit could hamper growth when a global upturn arrives.

"We have to stop public sector debt becoming an obstacle when the Spanish economy is in a better condition to grow," said central bank governor Miguel Angel Fernandez Ordonez in a speech accompanying the Bank of Spain's annual report.

"Any chance of using fiscal policy to increase spending has now been exhausted," he said.

His words are unlikely to please the government of Socialist Prime Minister Jose Luis Rodríguez Zapatero, who reacted testily to earlier pronouncements by the bank governor this year on the need for pension and labour market reforms.

"I wish it was the last time I had to disagree with the governor of the Bank of Spain," labour minister Celestino Corbacho said a few months ago following comments by Mr Fernandez Ordonez.

Despite also being a Socialist and a former government official, tensions between Mr Fernandez Ordonez and the government have grown this year as the Spanish government embarked on one of Europe's largest fiscal stimulus plans to counter the recession.

Former finance minister Pedro Solbes was replaced by Elena Salgado earlier this year following his complaints over government overspending.

Ms Salgado – whose economic forecasts have generally proven to be overoptimistic – appears to have adopted a more realistic tone following the end of European election campaigning, during which the state of the economy was a central issue.Shaky economy

Spain's unemployment – by far the highest in Europe – hit 18.1 percent in April and is expected to top 20 next year, bringing with it a corresponding increase in social spending and a growing strain on state coffers.

The country's unemployment rose to 24 percent in the early 1990s and stayed in double figures until 2005.

Added to this, the latest government forecasts now predict the economy will exit the recession later than most EU member states and will not return to annual growth before 2011.

However Mr Fernandez Ordonez says further fiscal spending to boost the economy would raise expectations of future tax hikes, with a rising budget deficit also likely to arouse investor concern.

Spain's credit rating was downgraded earlier this year, along with a number of other European countries.

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