Spain Revises Upwards Fiscal Deficit Targets And Prepares A Package Of Fiscal Measures

The Government of Pedro Sánchez has admitted that Spain will not meet the fiscal deficit targets set by the previous government of Mariano Rajoy. The new targets are -2.7% for 2018 (as opposed to -2.2% before) and -1.8% for 2019 (as opposed to -1.3%). The announcement of these measures this morning initially had a negative impact on Spain’s risk premium, which rose to 99 b.p. From 94 p.b. At yesterday’s close. For some analysts the increase in the risk premium could remain at this level until the end of the year because of relaxing the fiscal deficit targets. The analysts at Bankinter point out:

“Until now we had been estimating 80 b.p. for the end of the year, with 10 year bonds at 1.50% (as against German 10 year bonds at 0.70%). With this information, and in a preliminary way, we are revising the premium upwards to 100 b.p., which is approximately where it is now.”

Economics and Enterprise Minister Nadia Calviño, following a meeting of Eurozone Economics and Finance Ministers (Eurogroup), argued that the deficit reduction path of the previous government was unrealistic.

The Economics and Enterprise Minister Nadia Calviño explained after the Eurogroup meeting that:

“If we tried to maintain the targets set by our predecessors of 1.3% of GDP we would have to adopt large scale adjustment measures which would have been tremendously damaging to the economic recovery.”

Concretely, the Minister argued that in that case “between 4 and 5 tenths could be lost in real GDP growth, and job creation would also suffer.”

In parallel the Spanish government is preparing a package of fiscal measures amounting to 0.4% of GDP, some 4.47 billion euros, although it is not clear whether these will expenditure cuts or tax increases. Brussels insists on a structural effort of 0.65% of GDP for 2019, but Calviño has suggested that the European rules allow a certain flexibility.

Bankinter analysts argue that everything leads one to believe that the fiscal measures of 0.4% of GDP will most probably mean an increase in fiscal pressure rather than a cut in public spending. This will affect private consumption and corporate investment, which in the middle term will mean revising down economic growth.