Recession-hit Spain's 2012 public deficit beats forecasts

MADRID Thu Feb 28, 2013 3:18pm GMT

People stop to read the discount signs of a store that is going out of business in downtown Madrid November 14, 2008. REUTERS/Susana Vera

People stop to read the discount signs of a store that is going out of business in downtown Madrid November 14, 2008.

Credit: Reuters/Susana Vera

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MADRID (Reuters) - Spain said it will not need new austerity measures this year after its public deficit beat forecasts of economists who had expected a deeper effect from a prolonged recession.

The deficit was 6.7 percent of gross domestic product (GDP) in 2012, the government said on Thursday, missing a goal of 6.3 percent but below European Commission and economists' forecasts of 7 percent Or higher.

"I insist that what we achieved is really big, important, really notable and it will help Spain and its regional governments recover their credibility," Treasury Minister Cristobal Montoro said at a news conference.

Investors pushed debt premiums for the euro zone's fourth largest economy to a euro-era high last summer, before the European Central Bank promised to backstop troubled economies' bond markets, on concern Spain could not control its deficit.

Spain's public shortfall was 8.9 percent in 2011, well above target and forcing the conservative government, which took power in December 2011, to pass over 60 billion euros ($79 billion) of unpopular tax hikes and spending cuts that will continue to take effect this year.

Including the one-off cost of rescuing the country's troubled banks - which equalled 3.25 percent of GDP - the deficit was 9.99 percent of GDP last year, Montoro said.

A cash injection late in the fourth quarter from a 3-percentage-point hike in value-added tax and changes to the corporate tax calendar helped the government reduce the deficit, according to preliminary figures.

Even as retail sales tanked and industry froze in December, data shows VAT receipts rose 176 percent in that month, year on year, to 3.2 billion euros ($4.2 billion) and corporate tax income rose 112 percent to around 4.2 billion euros.

The December boost helped to shrink to under 7 percent a 12-month deficit that at the end of October had stood at 9 percent.

That rapid shrinkage has led some economists to calculate that future tax receipts were booked into 2012 income and payments delayed to boost the headline figure.

While Spain is not expected to have broken any rules in its accounting, putting off payments could come back to haunt the government in 2013, economists said.

"The figures are completely out of line with the current economic environment. It's only a few decimal places here and there due, I suspect, to some delayed payments to suppliers and the early declaration of some tax receipts," said an economist at a leading Spanish think tank, who preferred to remain unnamed until the full December details had been reported due mid-March.

"But, this is feast today, famine tomorrow. They're shifting all the problems to 2013."

Montoro said European Commision statistics agency Eurostat would not have any issues with Spain's public accounts.

NEW FOCUS ON STRUCTURAL DEFICIT

Brussels has said it is satisfied with Prime Minister Mariano Rajoy's cuts and reforms and the European executive is expected to give Spain a second extension on shrinking the deficit to under 3 percent, currently set for 2014.

Brussels' current forecast is for Spain's deficit to jump to 7.2 percent next year as temporary tax hikes expire.

It is still unclear how much relaxation Spain will get on its 2013 deficit target, which is now set at 4.5 percent of GDP, but Montoro was confident the government would not have to announce new budget cutting measures.

"There is no reason at all to introduce new budget cutting measures this year," he said.

Brussels has increasingly focused on members' structural deficits, which eliminates the effects of the recession.

The European Commision has calculated that Spain reduced its structural deficit last year by 1.4 percent of GDP, well below a recommendation to cut it by 2.7 percent of GDP.

Montoro, however, said the government had cut the structural deficit by almost 3.5 percent of GDP last year but said Brussels must now look over the figures to see if it agrees.

The economy contracted 1.4 percent last year, the second worst yearly slump since 1970, but the government expects growth, after more than almost two years in recession, by the third or forth quarter. ($1 = 0.7628 euros)

(Additional reporting by Jan Strupczewski, Editing by Fiona Ortiz, Ron Askew)

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