09 October 2012

Bloomberg: Rajoy's deepening budget black hole outpaces Spain's cuts

The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall rose in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4 per cent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid.

Rajoy  has introduced more than €100 billion of tax increases and spending curbs amid a slump that is hollowing out his revenue base and pushing unemployment to 25 per cent. The 57-year-old premier is also facing a secession threat from Catalonia, mounting popular protests and unrest from regions forced to rein in their own spending.

Rajoy last week pushed back expectations of a bailout, telling reporters no request was imminent. His deputy, Soraya Saenz de Santamaria, said the government needs to ensure a request for help from the European Stability Mechanism would be granted before it can call for aid. A bid to the ESM is needed to trigger support from the European Central Bank.

Spain’s economy probably contracted for a fifth quarter between July and September, according to the central bank. Output won’t return to the 2008 level until at least 2017, the International Monetary Fund forecasts. As a result, the programme of budget consolidation the EU first set out for Spain in 2009 is going backwards.

Government debt will leap 17 percentage points to 85 per cent of GDP in 2012 as the state absorbs the cost of bailing out banks, the power system and public contractors. That will add at least €10 billion to Spain’s borrowing costs next year, offsetting the gain projected from the sales-tax increase.

Full article

© Bloomberg