Spain agrees new deficit target

Mariano Rajoy
Rajoy claimed victory over deficit target

Brussels has set a new deficit target for Spain and Mariano Rajoy’s government have accepted it, claiming a victory after winning some concessions.

The target for this years budget deficit is now 5.3% of GDP, slightly lower than the 5.8% target that Rajoy set last month without consulting EU officials.

Following the decision Spain’s economy minister, Luis de Guindos, said “Spain is completely committed to the budget adjustment,” and that the new target “will be accepted by the government”.

The new target is half a percentage point lower than Rajoy was hoping for and this means an extra five billion euros must be saved via spending cuts or tax increases. This is on top of the 15 billion euros of savings already expected in the upcoming budget.

Rajoy is claiming a political victory despite EU ministers rejecting his 5.8% target, which he said was a matter of national sovereignty, as the original target passed from Brussels was 4.4%, previously agreed by Zapatero’s socialist government.

The prime minister argued that his government had inherited a large deficit overshoot when they were elected in November and risked another recession if he imposed too much austerity, an argument which the EU’s senior economic official, Olli Rehn, accepted.

Spanish foreign minister, José Manuel García-Margallo said “The Spanish government has won this battle.”

He added that EU leaders had taken the Spanish arguments seriously saying “They gave us the maximum possible.”

The Spanish government have previously said that Spain will cut their public sector deficit to 3% of GDP by 2013 and this was reiterated in Brussels.

Sr. Rajoy has yet to announce how he intends to meet the target as the national budget has been postponed pending the outcome of the regional election in Andalucía, due later this month. The region is currently under socialist rule.

Economists and analysts say it will be difficult for Spain to reach it’s target without increasing the risk of a second recession. Too many spending cuts or tax raises could push the economy downwards, increasing unemployment which, in the long run, will not increase tax revenue for the state.

“We remain concerned that it will be very difficult for Spain to achieve this level of fiscal consolidation, especially given that the economy has already moved into recession,” Barclays Capital said on Tuesday.