Spain’s 2012 deficit challenge

Spain must squeeze an “unprecedented” 40 billion euros out of its 2012 budget in order to meet its deficit cutting target, Moody’s warned on Monday.

The ratings agency said the new Spanish government faced a tough challenge in 2012 due to overspending in 2011 made worse by the struggling economy, despite record tourist figures.

In December the government said the 2011 public deficit would be eight per cent of GDP which was down on the previous estimate of 9.3 per cent, but still two points over the six per cent target.

“The large fiscal deficit in 2011 is credit negative and clearly illustrates the challenge facing authorities in bringing Spain’s finances back onto a sustainable path,” Moody’s Investors Service said.

New Prime Minister Mariano Rajoy has said his government will stick to a target of cutting the deficit to 4.4 per cent of GDP in 2012.

“Achieving this year’s unchanged budget deficit target of 4.4 per cent of GDP for the general government sector requires an unprecedented effort,” Moody’s said in a report adding that “Under our assumptions the required adjustment is around 40 billion euros.”

The amount required dwarfs the country’s previous deficit reductions for 2010 and 2011 with a combined total of 28 billion euros.

Moody’s said “Achieving such a massive fiscal adjustment amid slowing economic growth risks exacerbating the negative economic outlook,”

The agency predict the Spanish economy will shrink by 0.5-1.0 per cent in 2012 following growth of 0.7 per cent in 2011.

Elected in November 2011, Rajoy’s government has announced spending cuts of 8.9 billion euros, which includes a public sector wage freeze, and tax increases to raise over six billion euros.