Spain slashes forecasts and delays deficit targets

April 26, 2013 - 2:29 PM
Spain Financial Crisis

A man walks past a poster in a bank window showing a smiling family with a message reading 'Tranquility is to feel that we are close to you' in Madrid, Spain, Friday April 26, 2013. The Spanish Government is to announce new round of reforms Friday that could include new cutbacks to meet deficit target.(AP Photo/Paul White)

MADRID (AP) — Spain slashed its economic forecasts Friday and said it would take two years longer than promised to cut its swollen deficit in an acknowledgement that its harsh austerity measures had failed to bring its finances under control.

Revealing its latest batch of reforms and measures, Spain's economy ministry warned that the country's economy will contract 1.3 percent in 2013, instead of 0.5 percent as originally predicted, but would grow 0.5 percent in 2014.

The Economy Ministry also said that the country's deficit would fall to 6.3 percent of its annual gross domestic product for this this year — more than 3 percent higher than the target set by the European Union, but much lower than 2012's figure of 10.6 percent.

It would meet the EU target in 2016 — two years later than the country had originally promised in July 2012 — when it would hit 2.7 percent.

There was also bad news for the country's biggest problem — unemployment, which reached 27.2 percent in the first quarter. The proportion of Spaniards out of work will barely change over the next two years, the government said, ending the year at 27.1 percent and dropping just marginally to 26.7 percent in 2014.

"The results have not been good but they could have been much worse," said Luis de Guindos, Economy Minister, Friday.

Spain's economy has been stuck in reverse since the collapse of the country's housing bubble in 2008 with the government running up a huge deficit — the highest among the 17 EU countries that use the euro— trying to prop up the country's banks. To rein in the government's finances, the country's conservative government has launched a series of financial and labor reforms and pursued a raft of spending cuts and tax increases.

But austerity has also inflicted severe economic pain. Slashing spending and raising taxes have proved to be less effective at reducing the deficit than initially thought — and perhaps counter-productive. As economies shrink, so do their tax revenues, potentially making it harder to close budget gaps.

Deputy Prime Minister Soraya Saenz de Santamaria denied there was a sense of failure within the government.

"Without a doubt much more needs to be done but the macroeconomic situation is better than it was at the end of 2011 or beginning of 2012," she said.

Christine Lagarde, Managing Director of the International Monetary Fund gave her backing to the Spanish government Friday.

"I strongly support the Spanish government's objectives of restoring a sound fiscal position while securing a recovery and creating jobs," she said.

"Today's announcement to pursue a more gradual consolidation path is a welcome step."

But some analysts were not impressed.

"Spain has, to all intents and purposes, thrown in the towel on fiscal austerity," said Nicholas Spiro, managing director of Spiro Sovereign Strategy. "The scale of the government's revisions to the country's GDP and budget deficit targets underscore the extent to which front-loaded fiscal retrenchment has exacerbated Spain's economic downturn and become self-defeating."

"This is a belated acknowledgement on the part of the Rajoy government that its macroeconomic policies have failed," he said in an analyst's note.

As the eurozone's economies continue to struggle to recover from the financial crisis, the effectiveness of using austerity as the main tool to bring deficits under control has been questioned. European Commission president Jose Manuel Barroso said this week that the prescription of lower spending and higher taxes may have hit the limits of public acceptance.

But Germany, Europe's biggest economy, has stuck to the line that spending your way out of an economic downturn would only result in more debt and deficit. German Finance Minister Wolfgang Schaeuble told Deutschlandfunk radio Thursday that "the misery would only start over again" if countries started to run up more debt.

The forecasts and reforms program are now going to be submitted to European Union authorities.

Among Spain's latest reforms revealed Friday, Saenz de Santamaria said a newly formed commission would study ways to adjust pensions. At present they are indexed to inflation.

Finance Minister Cristobal Montoro said the government was studying a new environment tax but ruled out a hike in gasoline taxes. He said it would introduce a tax on certain bank deposits it hoped would bring in some to 300 million euros.

"We find ourselves at a point where we do not have to make major tax increases," said Saenz de Santamaria.

"The efforts made so far allow us to not have to make big adjustments, but rather continue to bet on the structural reforms made."

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Associated Press writer Harold Heckle contributed to this report.