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25 March 2013

Banco de España: Economic Bulletin


This report includes the analysis, conducted by the Banco de España's Directorate General for Economics, Statistics and Research, on the situation of and the outlook for the Spanish economy for the years 2013 and 2014.

The deteriorating confidence, the tight financial conditions for households and for non-financial corporations, the weak labour market and the contractionary effect of private-sector balance sheet restructuring and certain fiscal adjustment measures prompted a sharp contraction of domestic demand which slipped 4.3 per cent in 2012 as a whole. These developments were partly offset by the positive contribution from the external sector (2.8 pp) and, as a result, GDP fell to 1.4 per cent. The greater budget consolidation in the final stretch of the year, together with the effect of the other above-mentioned factors, resulted in a strong contraction of domestic spending in the last quarter of 2012. This, in conjunction with sluggish sales to the euro area as a whole, caused the decline in GDP to step up in Q4, with year-on-year and quarter-on-quarter rates of decrease of 1.9 per cent and 0.8 per cent, respectively.

In the fiscal policy arena, early definition, over a medium-term horizon, of the necessary measures to maintain a path of sustained deficit reduction and strict application of the mechanisms introduced in the new budget stability law to identify and appropriately correct possible slippage in the budget plans would increase confidence in the success of the fiscal consolidation process. Similarly, the completion of the various stages of the restructuring of the financial system could have a positive effect on agents’ confidence and on conditions of access to credit for households and corporations.

The fiscal assumptions for 2014 are partly based on the official targets set out in the 2013- 2014 Budget Plan and, in particular, on certain discretionary items of expenditure. On the revenue side, it is important to note that a number of fiscal measures applied in 2012 and 2013, with a significant impact on receipts, are due to expire in 2014. These include the higher personal income tax rates, the withdrawal of or reduction in certain corporate income tax deductions, the property tax surcharge and the reintroduction of the wealth tax. This report assumes that these fiscal measures, the total impact of which would be around 1.2 per cent of GDP, will be retained in 2014, since, in the absence of offsetting measures, their termination would cause the budget deficit to return to an upward trend in 2014, widening the gap with respect to the target set for that year.

The pursuit of appropriate economic policies may help to improve the resilience of the Spanish economy if the aforementioned or other downside risks materialise and also to increase the plausibility of other scenarios more favourable than the baseline scenario of these projections. In particular, fiscal policy could contribute decisively to boosting investor confidence in our economy by reinforcing credibility gains made through a mediumterm budgetary programme which were to provide sufficient details of the content and impact of government revenue and expenditure measures allowing fiscal consolidation to be completed and including the measures needed to address the impact of population ageing on public finances. Simultaneously, the tools envisaged in the Stability Law should be applied in full to avoid deviations from target or ensure their early correction. Making headway in the road map set in the Memorandum of Understanding for restructuring the financial system should also have a positive effect on the outlook for the sector, with the resulting favourable impact on the financing conditions of credit institutions and, consequently, on those of other economic agents. Additionally, the pursuit of policies to enhance the sensitivity of prices, margins and wages to business cycle conditions will spur the reallocation of resources to projects and sectors with higher growth potential. Lastly, policies aimed at improving the efficiency of the economy will make for faster recovery of competitiveness and, in short, raise the potential for growth and job creation.

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