Spain Says Fiscal Rigor Isn't Sacred in Raising Deficit Forecast

(Bloomberg) -- Spanish Budget Minister Maria Jesus Montero said fiscal rigor shouldn’t trump economic growth as the new Socialist-led government raised its budget deficit forecast.

Spain, which has the European Union’s biggest budget deficit ratio, is relaxing its targets to boost retiree benefits, expand health care and take over toll-highway concessions. Economy Minister Nadia Calvino said Thursday the deficit is expected to reach 2.7 percent of gross domestic product this year, compared with the last government’s 2.2 percent estimate.

“At this point of the economic cycle, the smart thing to do is to mix deficit reduction with support from the budget, so citizens can see that institutions are on their side,” Montero told reporters in Madrid on Friday. “Growth and job creation shouldn’t be oppressed by the rigidity of commitments that are impossible to comply with.”

Prime Minister Pedro Sanchez took office in June on a platform that includes expanding social programs, having ousted conservative Mariano Rajoy in a parliamentary vote after lining up allies from the anti-establishment Podemos party to Catalan separatists. On Friday, the government pledged a pay increase for civil servants. It’s also committed to increasing defense spending in response to pressure by U.S. President Donald Trump on European allies.

Structural Deficit

Sanchez’s plans include limiting tax deductions for corporations and is pressing ahead with a levy on electronic commerce and banking. The premier says Spain will stay within the 3 percent deficit limit set by European Union rules, so the country is expected to exit the EU’s excessive-deficit scrutiny this year.

“Spain is missing an opportunity to reduce its structural deficit, which in turn will reduce room to implement measures if at some point there is a recession,” said Maria Jesus Fernandez, a senior economist as saving banks foundation Funcas. “Revenue measures are lacking in details so we raised our budget deficit estimates for Spain ourselves.”

Spain is raising its deficit estimates by about 12 billion euros ($14 billion) for this and next year, as the government indexes pensions to inflation and takes over expiring highway concessions. The government plans to increase the coverage of health services and considering an increase in subsidies for medicines.

Calvino told reporters in Brussels she expects a 2019 deficit of 1.8 percent, up from 1.3 percent previously reported by the Spanish government to the European Commission.

The commission trimmed its growth estimate on Thursday for Spain to 2.8 percent in 2018 from 2.9 percent, citing an increase in crude prices and less favorable momentum for exports. The government is forecasting 2.7 percent.

“The Spanish government -- and we have been saying since the change of government -- is completely committed to budget stability,” Calvino said.

©2018 Bloomberg L.P.