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Brussels will only approve the new deficit target after seeing budgets

Hacienda prepares public accounts with margin to deal with political negotiation

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Brussels will only approve the new deficit target after seeing budgets

In principle, Brussels will be conformed this year with government lowering public deficit of 3% of GDP and consequently abandoning so-called excessive deficit procedure after a decade, European mechanism for safeguarding accounts of Member States with Public finances in difficulties.

This process, for countries with red numbers above 3% of GDP, is a year-by-year adjustment that is measured by fulfilment of committed deficit targets. However, once you get out of that corrective arm, you will pass in 2019 to so-called preventive arm. Which doesn't work with deficit targets like so far. As much as minister announces a path, se figures will not be important thing: instead of deficit targets, a specific structural adjustment will be required each year, i.e. a set of measures on a permanent basis and irrespective of cycle. These can be tax cuts or raises. For Spain in 2019, adjustment imposed by Council of European leaders to Rajoy government amounts to 0.65% of GDP, that is: almost 8 billion. And this already meant a substantial reduction from 1% of GDP initially requested, but n Minister Román Escolano managed to slow down.

However, mechanics of calculating this structural effort is very complicated and debatable because it depends on arduous economic models. And partly because of this complexity, rules of preventive arm allow a certain margin for deviation without launching of sanctions mechanism, whose punishment is entry of a deposit of 0.2% of GDP. As reflected in formulary of European Stability Pact, countries can deviate from structural adjustment by 0.5 points of GDP in two years: eir 0.5% in a single year and no deviation in following, or distributing 0.25% in one exercise and 0.25% in anor.

Minister Calviño announced last week that next year alone will make a structural adjustment of 0.4% of GDP — about 5 billion — and not 0.65% as EU claims. That is to say, it has simply moved Commission that in budgets of 2019 it will not comply with this structural adjustment. This was approved by Council of European leaders, it is very difficult to change and refore has not been changed. But minister can be exceeded by 0.25 points without sanctions procedure being triggered. And with that margin he's playing Calviño. "It could have taken 0.5% margin only for 2019, but it has wanted to give an image of commitment to budgetary stability," said sources of economy.

More information
  • The government softens deficit target of 2018 and postpones an adjustment of 6 billion
  • The government will make adjustment of 5 billion with tax increases

Instead of grading budgets as "meeting", Commission will give right to nuance that "broadly complies". In any case, margin of public accounts seems meager. That structural adjustment of 5 billion has to be done without policy changes. Or what is same: about accounts as y are today without furr measures. For each additional increase in spending, or added adjustments will have to be undertaken to compensate.

According to Fiscal authority, budgetary gap would be placed without doing anything in 2.2% at close of 2019. And it should take up to 1.8% in 2019 if fulfilled with structural adjustments. To give an idea of scale of challenge: in 2018 deficit will only fall in four tenths whenever it is wrap to objectives. In 2019 it would have to be cut in nine tenths, more than double. And spending announcements that Sanchez's executive raised will need higher revenue than already-demanded adjustment.

For same reason, Government will ask parties with whom to negotiate to get wet and specify what taxes y raise or what y cut in exchange for each measure y require to provide support for budgets.

The danger of not complying with 2.7%

According to tax authority's estimates, deficit now reaches 2.9% of GDP. It is true that collection is evolving favorably and that re are savings by interest that should help. However, re is always risk of relaxation. So ministries of economy and Finance will have to make sure that it complies with 2.7%. To end 2018 in 2.8% or 2.9%, it would mean that Government has made no effort to reduce budget gap. Rar opposite: according to calculations of BBVA Research, to comply with 2.7% already implies to worsen structural deficit, that which does not consider bonanza of cycle. Especially with a growth of almost 3%.

If it closes with 2.9% of deficit, Commission could get tough. Even at worst extreme, I could judge that country should not leave excessive deficit procedure: according to rules of Fiscal Compact, to get out of this special surveillance system is not enough to leave deficit below 3%. It must also be done in such a way that Commission thinks it is sustainable. With so little leeway and a slowdown in economy ahead, re is always possibility of propine to Spain a tug of ears. In any case, default of 2.7% would cause structural adjustment of 2019 to be greater, leaving even less margin.

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