Spain Must Get Deficit Efforts on Track, Central Bank Says

  • Spain missed deficit-reduction goal in 2015 despite warnings
  • Spaniards heading for second election in six months June 26

Spain’s next government must tackle the nation’s fiscal imbalances by applying tougher rules to rein in spending and avoid missing its targets, the central bank said, as the four main political parties clash on how to narrow the deficit ahead of June’s vote.

“We must not minimize the risks from having such elevated levels of debt for the economy as a whole,” Governor Luis Maria Linde said in his introduction to the central bank’s 2015 annual report published Friday. “Retaking a path that corrects these fiscal imbalances is a priority, and for that it’s necessary to have a detailed program.”

The central bank’s warning comes as the four main political parties quarrel over how to tackle the deficit and the European Commission debates whether to fine Spain for missing its goal last year by almost one percentage point. Spain’s budget shortfall came in at 5.1 percent of output last year compared with a goal agreed with the commission of 4.2 percent.

The Spanish central bank also noted tailwinds that propelled growth last year -- ranging from lower oil prices to a favorable euro exchange rate -- will progressively fade, moderating the pace of economic expansion over the short and medium term. To cement the recovery, further action must be taken to tackle macro imbalances such as low productivity and deleveraging of the private sector, the Bank of Spain said.

To end the duality in the labor market that separates workers on fixed, more stable contracts and those employed on a temporary basis, the central bank called for measures that promote wage flexibility and reduce the “excessive” protection for permanent staff that is detrimental for those who are on short-term contacts.

“To correct the strong incentives that regulation provides for temporary hiring, it’s necessary to make permanent hiring more attractive, ” the governor said, adding that unemployment is the main source of inequality among Spaniards.

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