De Guindos Suggests Spain to Miss Deficit Plan Amid Weak Growth

Spanish economy minister Luis de Guindos said he will refrain from imposing extra austerity even as public borrowing figures are likely to miss targets because of a weaker-than-expected economy.

Government fiscal forecasts due April 26 will be adjusted to account for a weaker “economic reality,” de Guindos told reporters in Washington today, suggesting he will miss previously set limits for the current fiscal year. He said forecasts will be “very conservative.”

“Budget policy has to be adjusted to economic reality,” de Guindos said after meetings with Group of 20 finance ministers. “It is essential that fiscal policy in the medium term is seen to be sustainable while bearing in mind the effects on economic activity of excessive fiscal restriction.”

Prime Minister Mariano Rajoy is seeking more time from European Union peers to cut the second-largest budget deficit in the euro region, as large as Greece’s as a share of gross domestic product. His government is concerned that Spain’s recession may worsen after it stepped up the toughest austerity measures in its democratic history last year.

Spain’s current deficit targets are 4.5 percent of GDP for 2013 and 2.8 percent for 2014. That compares with overspending of 10.2 percent of GDP last year, or 7 percent excluding aid to the banking sector.

After an economic contraction of 0.5 percent this year, the government forecasts 1.2 percent growth in 2014, compared with the 0.45 percent median estimate in a Bloomberg survey of 42 economists. Banco Santander SA, Spain’s biggest bank, estimates 1.5 percent growth next year, while Nomura International foresees the economy shrinking a further 1.5 percent and Goldman Sachs Group Inc. predicts a 0.2 percent contraction.

Shrinking Output

De Guindos on April 9 estimated output shrank between 0.5 percent and 0.6 percent in the first quarter, narrowing from the 0.8 percent drop in the previous three months. The Bank of Spain sees the economy stabilizing in the second half even as it maintains a forecast of a 1.5 percent contraction for the full year.

De Guindos said today that automatic stabilizers -- increased welfare spending and lower tax receipts when the economy weakens -- should be allowed to operate.

“It could be that in one year the deficit isn’t reduced by as much as expected even though the effort to bring it down has been in line with what has been required,” de Guindos said.

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