June 15, 2018 / 10:58 AM / 3 months ago

UPDATE 1-Bank of Spain expects government to miss deficit target this year

(Adds details, quotes)

By Paul Day

MADRID, June 15 (Reuters) - The Bank of Spain said measures included in the 2018 budget meant the government would miss its deficit target this year by a wider margin than originally slated in March, according to forecasts on Friday.

Spain is likely to record a public deficit of 2.7 percent of growth this year, higher than it forecast in March, when the bank foresaw a shortfall of 2.4 percent of gross domestic product.

Spain ended 2017 with a public deficit of 3.1 percent of economic output, in line with European Union targets, and aimed to reduce the shortfall to 2.2 percent of GDP this year.

The 2018 budget proposal, delayed amid a political crisis in the northeastern region of Catalonia and not yet passed in full by Parliament, includes a 1.6 percent rise in pensions after years of rises of no more than a quarter of a percent.

“In comparison to the March projections, the most relevant changes in the underlying reasons for the forecast are related to budget policies,” the central bank said.

Wage hike agreements to 2020 and tax measures were also a factor, it said.

RISKS REMAIN

The Bank reiterated growth forecasts for this year of 2.7 percent and raised its predictions for next year to 2.4 percent from 2.3 percent previously.

Downward risks to the forecasts included global geopolitical uncertainties, such as a possible escalation of protectionist trade policies and measures by the new Italian government, and the normalization of euro zone monetary policy, it said.

On Thursday, the European Central Bank said it would wrap up its stimulus programme at the end of this year but leave interest rates at record lows through the summer of 2019.

Within Spain, the bank warned of a lack of parliamentary majorities after the Socialists took over June 1 following a vote of no confidence against former Prime Minister Mariano Rajoy amid a slew of corruption charges within his party.

“The current parliamentary fragmentation could make budget consolidation and the adoption of reforms aimed at increasing the economy’s potential growth more difficult. The absence of advances on both fronts could have adverse effects on confidence,” the bank said.

The Socialists hold just 84 seats in a 350-seat parliament, while Rajoy’s PP has 137 seats, market-friendly Ciudadanos 32, anti-austerity Podemos 67 and the rest split between smaller parties. (Edited by Jesus Aguado, Larry King)

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