By Juan Pedro Marín Arrese, in Madrid | The new elected Cabinet warned in mid-December about a substantial deviation from the planned deficit in last year. Its early forecast pointed to a revised figure of around 8% in terms of GDP, in stark contrast with the 6% target, claimed by the out coming government to have roughly held on line. Final deficit, announced on Monday by the Finance minister, has climbed to 8,5%, hitting a thoroughly worrying level. In short, 2011 ranks as a lost year in terms of fiscal consolidation. Modest progress undertaken by central administration has been hugely overrun by regional authorities’ profligacy.
Finance minister Cristóbal Montoro is right in rebuking any temptation to put the blame on others. He is also right in refusing to appeal to flexibility as a short cut in circumventing the pressing need to redress the current disarray in public finances. But for all his efforts to enforce budgetary discipline, the objective to reach a deficit of 3% in 2013 seems out of reach. Markets seem nowadays tame as ECB monetary overdose provides little incentive to trade short any financial asset. But as they gradually assume that Spanish debt is far from immune to a snowball effect, the country risk premium might come under severe strain.
It will come as no surprise that budget this year will have to accommodate itself to an awful starting point. Recession will also contribute to trim down any hope to bring down deficit in a significant way. Income receipts might even exert extra downside pressure. Axing expenditure stands as the only plausible answer. But acting accordingly is likely to depress the economy still further, dashing any hope for a mild recovery. It will also raise unemployment to untenable levels. Matching such contradictory objectives could only be achieved by postponing fiscal consolidation. A nasty outlook easily turned into widespread instability.
Government is walking in a tight rope. The safest way to avoid the worst from happening is to stick to tight budgetary targets. Should income fail at the end of the day, following a full-fledged recession, no one would blame it for not keeping the target. Throwing the towel beforehand, by anticipating meagre results, would simply amount to concede early defeat thus leaving the door open to mounting speculation and potentially dismasting attacks. Only a credible consolidation path, solidly anchored on expenditure cuts, can save the day.
* Juan Pedro Marín Arrese is an economist.