Madrid Seen Likely to Follow Greece, Portugal in Missing Budget Target as Economic Scene Worsens.
Slowing economic growth, spiraling unemployment and overspending by its powerful regional governments could make Spain the latest ailing euro-zone country to miss its budget target this year.
The Socialist government of Prime Minister José Luis Rodríguez Zapatero won praise last year for measures that let it cut a budget deficit equal to around 11% of gross domestic product in 2009 to just over 9% in 2010. These steps, plus politically difficult overhauls of Spain's labor market and pensions system, helped shore up investor confidence, setting the country apart from its fiscally frail peers.
But this year, as the European debt crisis deepens and global growth slows, Spain could follow in the footsteps of Greece and Portugal, which have already warned their deficit-cutting efforts have gone off track. On Thursday, Standard & Poor's downgraded Spain by one notch, in the latest blow to its status.
Though the Spanish government insists it will cut its deficit to 6% of GDP as promised, a growing number of independent economists believe it will fail to meet this target, possibly by a wide margin.
Such a failure could raise new doubts about Europe's ability to stem its tide of red ink. Large budget gaps means debt levels could continue to grow, which, coupled with signs spending cuts are crimping growth, could add to the mounting crisis.
That outcome would also put the new Spanish government that comes out of Nov. 20 general elections under enormous pressure to get the country's deficit under control. Spain has pledged to cut its deficit to the 3% limit for European Union countries by 2013. Polls indicate it will likely be the conservative Popular Party of Mariano Rajoy, currently in the opposition, that takes up the challenge.
Few would disagree that Spain's budget deficit will likely be at least 6.5% of GDP this year, said Jordi Sevilla, senior counselor of PricewaterhouseCoopers, and an ex-minister of public administration in Mr. Zapatero's government. "This will be the first test for the new government," he said.
A September poll of analysts from 22 international banks and research institutions by FocusEconomics forecast that Spain will have a budget deficit equal to 6.5% of GDP this year.
Many economists agree that one major component of the Spanish budget, the country's central government, can meet its year-end target of a deficit equal to 4.8% of GDP. That is because the government has taken steps in recent months to bolster revenue, including bringing forward corporate tax payments and temporarily reinstating a wealth tax it killed in 2008. That expectation comes despite evidence that Spain's timid economic recovery could have slowed to a standstill in the third quarter and that tax-revenue growth is plummeting.
Still, the central government won't likely be able to compensate for budget overruns at other levels of government, as it did last year when both regional governments and the social security administration failed to meet their targets, said Angel Laborda, head of analysis at think tank Funcas. Mr. Laborda forecasts Spain's overall budget deficit will be around 6.8% of GDP, with "risks to the upside."
Though monthly budget data aren't available for the regional governments that control over one-third of spending in Spain, first-half data showed they had a collective deficit equal to 1.2% of GDP, just short of their 1.3%-of-GDP target for the whole of 2011. The Spanish finance ministry says draconian austerity measures promised by the regions will keep spending in check in the second half.
Many analysts say time is running out for new cuts to have a large impact, and with spending historically weighted toward the end of the year, they expect the regions to amply surpass their 2011 targets.
Roberto Ruiz, an economist in Madrid for UBS Bank SA, said he forecasts the regions' collective 2011 budget deficit will come in at around 2% or 2.1% of GDP. He forecasts Spain will have an overall government deficit of around 6.6% of GDP.
Similarly, growing job losses are rapidly eroding the surplus of Spain's social security administration, which is responsible for paying Spanish pensions and is financed by payroll taxes. Madrid's move to freeze most pensions this year—as part of a package of austerity measures— and to change the way accident-insurance funds are accounted for will boost the social security surplus by nearly €1.8 billion ($2.5 billion) this year, a spokeswoman said.
But after data for the year's first eight months showed the surplus at nearly half its level of a year earlier, many analysts say its year-end target of 0.4% of GDP was at risk.
"Data on the social security budget suggests the system is likely to report a deficit at the end of the year," said Giada Giani, economist at Citigroup Global Markets who forecasts Spain's total budget deficit will surpass 8% of GDP this year.
Central government and social security budget data for September will be available at the end of October, while third-quarter data for the regions is expected by the end of November.
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