Spain Says Deficit Target Must Wait 2 More Years Amid Slump

Spanish Prime Minister Mariano Rajoy sought a two-year extension to meet European Union deficit rules, as he lowered his growth forecast and predicted little relief from a record 27 percent unemployment rate.

Rajoy’s Cabinet at a meeting in Madrid today approved a plan to cut the shortfall of 10.6 percent of gross domestic product back within the EU limit of 3 percent by 2016 instead of 2014 as demanded by euro-area governments. The European Commission endorsed the plan in a statement on its website.

This is “a balanced, but still ambitious fiscal consolidation path, given the difficult economic environment,” the commission in Brussels said.

With the euro area in its second year of recession, officials in Brussels and Berlin are backing away from their austerity-first policies amid criticism from institutions including the International Monetary Fund. Spanish output has contracted for seven straight quarters and remains 6.5 percent below its 2008 peak. In mid-2012, Rajoy won a one-year extension until 2014 to meet the 3 percent target.

“It means that the fiscal framework is much more flexible than a lot of people think,” Gilles Moec, co-chief European economist at Deutsche Bank AG in London, said in a telephone interview. “You have a collective decision to allow more time. It’s the opposite of what Spain did last year.”

Peers Riled

Rajoy riled his peers by announcing he wouldn’t recognize European budget restrictions in March 2012 just hours after signing an agreement to tighten budget rules. His comments helped trigger a bond market rout that added almost 300 basis points to Spain’s 10-year borrowing costs.

“As regards coordination with the European institutions, there has been a dialogue and there has been coordination,” Economy Minister Luis de Guindos told reporters in Madrid. “What has changed fundamentally is that the global economy performed worse than expected in 2012.”

Spain will delay by one year a plan to cut income taxes in order to narrow the budget gap next year, Budget Minister Cristobal Montoro said. Rajoy increased all income-tax brackets on Dec. 30, 2011, within days of taking office, saying the move would be reversed in 2014. That will now happen in 2015 as Rajoy gears up for the next general election.

The government will take measures to enable the economy to grow 0.5 percent next year, Deputy Prime Minister Soraya Saenz de Santamaria said. That compares with a July forecast for a 1.2 percent expansion in 2014.

Cutting Bureaucracy

The government will draft laws to cut bureaucracy for entrepreneurs and break down barriers for companies trading across regional boundaries, Saenz said.

The yield on Spain’s 10-year bonds dipped 2 basis points to 4.27 percent as of 4:53 p.m. Madrid time. That compares with a euro-era high of 7.75 percent in July, before the European Central Bank pledged to support the euro.

Rajoy’s new economic plans also include measures to boost the supply of credit for smaller companies, Saenz said. The government says its labor-rules overhaul implemented last year contributed to higher exports as it enabled companies to cut costs.

Jobless Rate

Still, the government increased its jobless rate prediction to 27.1 percent for 2013 from 24.3 percent and estimated it at 26.7 percent next year. In the first quarter, the rate was 27.2 percent.

Spain’s budget deficit will be 6.3 percent of GDP this year and will fall to 2.7 percent by 2016. Excluding loans from its banking bailout, Spain’s deficit was 7.1 percent of GDP last year, compared with 9.1 percent a year earlier, Eurostat data show.

“Spain is turning the corner,” Montoro said. “This is what is opening up the doors to finance the country and this finance will create growth and jobs.”

The total stock of government debt will reach 96.2 percent of GDP next year and 99.8 percent in 2016.

“Spain faces big risks,” said Robert Wood, an economist at Berenberg Bank in London. “The capacity to react to further economic deterioration is much more limited now than it was a couple of years ago so it’s pretty important growth returns sooner rather than later.”

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