Spanish government loosens deficit targets as revised forecasts add to gloom

The Spanish government has painted a gloomy picture for the country’s economy and significantly loosened deficit targets it had previously agreed with the European authorities.

While presenting a revised set of forecasts yesterday, deputy prime minister Soraya Sáenz de Santamaría said the economy would shrink this year more than previously expected and that unemployment would not drop below 25 per cent until 2016.

There had been speculation that the conservative government would unveil a battery of reforms yesterday and it did announce the extension by a year of a temporary income tax increase plus the elimination of red tape to encourage foreign entrepreneurs to come to Spain.

But most of the announced reforms, such as a €40 billion credit line for small businesses, had already been flagged and Ms Santamaría said no major new measures were planned. Prime minister Mariano Rajoy did not attend the presentation.

“The new forecasts are extremely conservative, very prudent and very cautious, in order to lend credibility to the government’s performance,” said economy minister Luis de Guindos, who was also at the unveiling of the new forecasts.

The administration sees GDP shrinking this year by 1.3 per cent, compared with its previous estimate of a contraction of 0.5 per cent. Growth is not expected to return until 2014.

On Thursday, new data showed the jobless rate had hit a record high of 27.2 per cent for the first quarter, sparking renewed criticism of the government’s insistence on austerity and a 2012 labour market reform. Youth unemployment is at 57 per cent.

Yesterday, the government said it would evaluate the labour reform, which sought to make hiring and firing easier and less costly.

Wavering on austerity
Ms Santamaría insisted Spain would continue along the path of reform, but the government's new deficit targets suggested it is not quite as committed to austerity as it was on taking power in December 2011.

The objective of bringing the public deficit under 3 per cent of GDP has been delayed from 2014 to 2016 and this year’s target has been altered from 4.5 per cent of GDP to a much more manageable 6.3 per cent.

In a statement, the European Commission said the deficit target correction was consistent with its own analysis, “given the difficult economic environment”. The forecasts and measures confirmed yesterday will be sent to the European Commission for full assessment.