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Document 52012DC0683
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit
/* COM/2012/0683 final */
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit /* COM/2012/0683 final */
COMMUNICATION FROM THE COMMISSION TO
THE COUNCIL Assessment of action taken by Spain
in response to the Council Recommendation of 10 July 2012 with a view to
bringing an end to the situation of excessive government deficit 1. Excessive deficit
procedure: Background On 27 April 2009, the Council decided, in
accordance with Article 104(6) of the Treaty establishing the European
Community (TEC), that an excessive deficit existed in Spain and issued a
recommendation to correct the excessive deficit by 2012 at the latest, in
accordance with Article 104(7) TEC and Article 3 of Council Regulation (EC) No
1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the
excessive deficit procedure. On 2 December 2009, the Council decided, in
accordance with Article 3(5) of Regulation (EC) No 1467/97, that effective
action had been taken and that unexpected adverse economic events with major
unfavourable consequences for government finances had occurred after the
adoption of that recommendation. As a result, the Council adopted a revised
recommendation under Article 126(7) TFEU to correct the excessive deficit by
2013 at the latest in a credible and sustainable manner by taking action in a
medium-term framework. On 15 June 2010, the Commission concluded
that Spain had taken effective action in compliance with the Council
recommendation of 2 December 2009 to bring its government deficit below the 3%
of GDP reference value and considered that no additional step in the excessive
deficit procedure was therefore necessary. On 10 July 2012, the Council decided, in
accordance with Article 3(5) of Council Regulation (EC) No 1467/97, that
effective action had been taken but that unexpected adverse economic events
with major unfavourable consequences for government finances had occurred after
the adoption of the revised recommendation in 2009. The Council therefore
adopted a revised recommendation under Article 126(7) TFEU (the 'revised EDP recommendation')
and recommended Spain to correct the excessive deficit by 2014 at the latest.
In order to bring the headline government deficit below the 3% of GDP reference
value by 2014, Spain was recommended to deliver an improvement of the
structural balance of 2.7% of GDP in 2012, 2.5% of GDP in 2013 and 1.9% of GDP
in 2014. Based on the Commission services' update of the 2012 Spring Forecast,
the headline deficit targets consistent with the requested improvements of the
structural budget balance are 6.3% of GDP for 2012, 4.5% of GDP for 2013
and 2.8% of GDP in 2014. The Spanish authorities were also recommended
to implement the measures adopted in the 2012 budget and in the Autonomous
Communities’ rebalancing plans and adopt the announced multi-annual budget plan
for 2013-14 by the end of July 2012, including a medium-term budgetary
strategy, fully specifying the structural measures, which on the basis of the Commission
services' update of the 2012 Spring Forecast, are necessary to achieve the
correction of the excessive deficit by 2014. They were also recommended to
adopt without delay additional measures in 2012, should risks to the budgetary
plans materialise. In addition, Spain was asked to strictly apply the new
provisions of the Budgetary Stability Law regarding transparency and control of
budget execution. In line with country-specific recommendations under the
European Semester, the Council also asked Spain to establish an independent
fiscal institution to provide analysis, advice and monitor fiscal policy, stick
to the enforceable nature of its medium-term budgetary framework as well as
closely monitor adherence to the budgetary targets throughout the year for all
the levels of the general government sector. 2. Assessment
of effective action taken This assessment is based on the Commission
services' 2012 Autumn Forecast. It takes into account the economic and
budgetary developments since 10 July 2012, when the last Council recommendation
under Article 126(7) TFEU was issued. According to the Commission services' 2012 Autumn
Forecast, real GDP is projected to contract by 1.4% in both 2012 and 2013,
before growing by 0.8% in 2014. At the time of the last Council recommendation
under Article 126(7) TFEU, real GDP was expected to contract by 1.9% and 0.3%
in 2012 and 2013, respectively. As the recovery was expected to come earlier
and to be somewhat stronger, real GDP growth was forecast to reach +1.1% in
2014. The slightly less negative growth forecast in 2012 is mainly due to
somewhat more resilient domestic demand as fiscal consolidation has had a more
gradual impact than expected at the time of the last Council recommendation
under Art.126(7) TFEU. Regarding 2013 and 2014, the Council recommendation was
based on a no-policy change assumption, while the Commission services’ 2012 Autumn
Forecast also takes additional consolidation measures included in the 2013-14
budget plan and the 2013 budget into account. In 2012, according to the Commission
services' 2012 Autumn Forecast, the general government deficit is projected to
decrease to 8.0% of GDP, or 7.0% of GDP excluding the effect of captial
injections into banks carried out in 2012, from 9.4% of GDP in 2011 (8.9% of
GDP excluding capital injections into banks carried out in 2011). This compares
with the government and revised EDP recommendation target of 6.3% of GDP. Despite
the projected deviation from the target, the expected decrease in the headline
balance would be underpinned by a substantial improvement in the primary balance,
of around 2½ percentage points (net of capital injections into banks carried
out in 2012), against the background of an economy shrinking by close to 1½
percent. To compensate for the likely deviation from the deficit target and in
line with the Council recommendation, on 13 July 2012 Spain adopted additional
consolidation measures of around 1¼% of GDP. Together with earlier
consolidation measures included in the December 2011 package, the 2012 budget
bill and regional rebalancing plans, total measures of around 5¼% of GDP were
adopted for 2012. However, a considerable part of these measures (more than 1½%
of GDP) has not been of a permanent nature. Various tax increases were
introduced only on a temporary basis or consisted in bringing forward tax
payments in time. The elimination of the Christmas bonus in the public sector
was also limited to 2012 only. This sizeable consolidation effort would partly be
counteracted by strong revenue shortfalls linked to a less tax-rich growth
composition and a stronger deterioration in the labour market, higher interest
payments and higher social transfers, linked to the increase in pensions
adopted in December 2011. Moreover, as in previous years, there are indications
that a number of regions would again miss their budgetary targets. Netting out cyclical factors and one-off
and other temproary measures, the Commission services' 2012 Autumn Forecast
foresees an improvement in the structural balance by 1.2 percentage points to -6.3%
of GDP in 2012, compared with an improvement in the structural balance of 2.7%
of GDP required in the revised EDP recommendation. Correcting for the downward
revision of potential output growth since the time of the last Council
recommendation under Article 126(7), the estimated structural effort in 2012
would be about 0.1 percentage points higher. Moreover, the change in the
structural balance was also severely affected by revenue shortfalls (i.e.
relative to GDP developments using standard revenue elasticities) which amount
to around 1½ percentage points of GDP. Overall, taking these revenue shortfalls
into account, the estimated structural effort would further increase to around
2¾ percentage points – in line with the effort required under the Council
recommendation. For 2013, the Commission services' 2012 Autumn
Forecast projects the general government deficit to decline to 6% of GDP,
compared to a target of 4.5% of GDP indicated by both the government and in the
revised EDP recommendation. The primary balance is expected to improve by 1.8
percentage points, net of bank recapitalisation measures, on the backdrop of
the economy that is forecast to shrink by 1.4%. Following the last Council
recommendation under Articke 126(7) TFEU, in August 2012, the Spanish
government presented a multi-annual budget plan for 2013-14. However, for 2013,
the plan did not specify many new revenue measures compared to what had already
been announced in the July 2012 package. The draft 2013 Budget bill presented
in September contained few new measures not previously announced (e.g.
extension of the wealth tax by one year). In total, the budgetary impact of discretionary
measures in 2013 is expected to be about 1¼% of GDP on the expenditure side and
about 1% of GDP on the revenue side. The expected budget deviation of 1½% of
GDP in 2013 is partly explained by the worse starting position carried over
from the previous year. However, the 2013 budget bill is also based on
optimistic macroeconomic assumptions, forecasting real GDP to contract by only
0.5 % and employment to stabilise. This implies a clear risk of revenues once
again underperforming and social transfers overshooting. In addition, the draft
budget law also seems to underestimate the increase in social benefits,
including pensions and unemployment benefits. For the regions, the main
consolidation measures in 2013 are the cuts in health and education included in
the 2013-14 Budget Plan. There is, however, no information currently available
on the actual implementation in regional budgets of these planned measures. According to the Commission services' 2012 Autumn
Forecast, the structural deficit is projected to further narrow by 2.3
percentage points and to reach 4.0% of GDP in 2013, broadly in line with the last
Council recommendation under Article 126(7) TFEU which requires a structural
improvement of 2.5% of GDP. Correcting for the change in estimated potential
output growth between the projections underlying the revised EDP
recommendations and the Commission services' 2012 Autumn Forecast, the
structural effort would be around 0.1-0.2 percentage points higher. For 2014, the Commission services' 2012 Autumn
Forecast foresees an improvement in the economic outlook with real GDP growth
returning to positive territory. This would not be sufficient to achieve a
further narrowing of the headline deficit, which is expected to widen to 6.4%
of GDP compared to a target of 2.8% of GDP. Apart from the base effect, the
expected deviation mainly reflects the expiry of temporary measures taken in
previous years, the fact that planned consolidation measures for 2014 were not
sufficiently specified in the multi-annual budget plan announced in August and
therefore could not be included in the Commission services' forecast, and that
the composition of economic growth would continue to be tax-poor, with tax
revenues not rising in full proportion to nominal GDP. Interest payments would also
keep rising due to a higher debt stock. The structural deficit is projected to
deteriorate by 1.3 percentage points in 2014, compared to a recommended
improvement of 1.9% of GDP. Correcting for the change in estimated potential
growth between the projections underlying the last Council recommendation under
Article 126(7) TFEU and the Commission services' 2012 Autumn Forecast, the
estimated structural effort in 2014 would be around 0.1-0.2 percentage points
higher. This leaves the structural effort about 3 percentage points short of
the level required by the Council recommendation. Adjusting for unexpected
revenue shortfalls would probably decrease this gap further, as some revenues
are not following the growth path implied by nominal GDP growth. However, given
that so far little or very few measures for 2014 have been specified, a
complete assessment of effective action for 2014 at this stage is not possible.
In the Council recommendation under Article
126(7) of July 2012, Spain was also asked to strictly apply the new provisions
of the Budgetary Stability Law (BSL) regarding transparency and control of
budget execution and to establish an independent fiscal institution to provide
analysis, advice, and monitor fiscal policy as well as to monitor adherence to
the budgetary targets for all levels of the general government. Regarding the
BSL, improvements have been made, in particular, on reporting of fiscal data
for regional governments, which represent a step forward in achieving higher
fiscal transparency. However, given the challenge of introducing new reporting
procedures across regional administrations, a sound track record regarding the
quality and consistency of reporting remains to be achieved. Critically,
implementation of the preventive and corrective arm of the Budget Stability Law
appears to be insufficient. No official early warning mechanism or corrective
action has been triggered so far, even though several Autonomous Communities
are clearly at risk of not meeting their fiscal targets in 2012. As regards the
establishment of an independent fiscal institution, on 27 September the Spanish
government took a decision to establish such an institution. Its remit and
governing structure is currently being defined. The institution is to be created
in 2013, once the relevant organic law has been adopted. 3. Conclusions On current
information, it appears that Spain has taken effective action that represents
adequate progress towards correcting the excessive deficit in 2012 and 2013
within the limits specified by the Council on 10 July 2012. In particular,
Spain has adopted sizeable consolidation measures amounting to around 5¼% of
GDP in 2012 and to 2¼% of GDP in 2013. Correcting for revisions in potential
output growth and for revenue shortfalls due to tax-poor growth, the estimated
annual improvement of the structural balance is in line with the effort
required by the Council for 2012 and 2013. However, in 2012 the provisions of
the Budget Stability Law with respect to the envisaged early warning and
corrective mechanisms to limit deviations from the budgetary targets of the
Autonomous Communities were not effectively implemented. This could lead to
renewed budgetary slippages at the regional level. For 2013, there are clear
risks to achieving the nominal targets stemming partly from an optimistic
macroeconomic scenario underlying the 2013 Budget bill and optimistic
projections for social security. As regards
2014, it appears that Spain has not taken sufficient measures yet to deliver
the required structural effort. The multi-annual budget plan announced in
August did not present sufficiently specified measures to underpin the recommended
fiscal effort. Therefore, there is still a need to specify additional,
permanent measures for 2014. In view of the
above assessment, while effective action has been taken for 2012 and 2013, the
measures for 2014 fall short of the revised EDP recommendation. Based on this
knife-edge assessment, the Commission considers that no further steps in the
excessive deficit procedure of Spain are needed at present. The Commission will
continue to closely monitor budgetary developments in Spain in accordance with
the Stability and Growth Pact. Furthermore, as
regards fiscal governance, despite progress being made with respect to
budgetary reporting at regional level, achieving a higher degree of fiscal
transparency would require more comprehensive, consistent and timely reporting
on a consolidated general government basis in line with ESA95. Finally, it
would be important to proceed with the establishment of the fiscal council as
planned and to ensure its full institutional and financial independence. Comparison of key macroeconomic and budgetary projections || || 2009 || 2010 || 2011 || 2012 || 2013 || 2014 Real GDP (% change) || COM AF 12 || -3.7 || -0.3 || 0.4 || -1.4 || -1.4 || 0.8 COM SF 12 || -3.7 || -0.1 || 0.7 || -1.9 || -0.3 || 1.1 SP || -3.7 || -0.1 || 0.7 || -1.7 || 0.2 || 1.8 Output gap1 (% of potential GDP) || COM AF 12 || -4.2 || -4.8 || -4.2 || -4.6 || -4.8 || -2.7 COM SF 12 || -4.3 || -4.8 || -4.2 || -5.3 || -4.7 || -2.8 SP || - || - || -3.8 || -4.3 || -3.8 || -2.1 General government balance3 (% of GDP) || COM AF 12 || -11.2 || -9.7 || -9.4 || -8.0 || -6.0 || -6.4 COM SF 12 || -11.2 || -9.3 || -8.9 || -6.3 || -6.1 || -6.4 SP || - || - || -8.5 || -5.3 || -3.0 || -1.1 Primary balance (% of GDP) || COM AF 12 || -7.7 || -7.0 || -5.0 || -2.2 || -2.5 || -2.1 COM SF 12 || -9.4 || -7.4 || -6.5 || -3.1 || -2.8 || -3.1 SP || - || - || -6.1 || -2.2 || 0.2 || 2.0 Cyclically-adjusted balance1 (% of GDP) || COM AF 12 || -9.4 || -7.6 || -7.6 || -6.0 || -4.0 || -5.3 COM SF 12 || -9.3 || -7.3 || -6.9 || -4.1 || -4.1 || -5.1 SP || - || - || -6.9 || -3.4 || -1.4 || -0.2 Structural balance2 (% of GDP) || COM AF 12 || -8.7 || -7.6 || -7.5 || -6.3 || -4.0 || -5.3 COM SF 12 || -8.7 || -7.3 || -7.0 || -4.3 || -4.1 || -5.1 SP || - || - || -7.3 || -4.4 || -2.2 || -0.2 Government gross debt3 (% of GDP) || COM AF 12 || 53.9 || -61.5 || 69.3 || 86.1 || 92.7 || 97.1 COM SF 12 || 53.9 || -61.2 || 68.5 || 80.9 || 86.8 || 91.8 SP || - || - || 68.5 || 79.8 || 82.3 || 81.5 Notes: 1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes. 2 Cyclically-adjusted balance excluding one-off and other temporary measures. 3 The financial sector assistance programme for bank recapitalization put in place on 23 July 2012 has not yet had any impact on the general government debt and deficit forecast for 2012-14. Source: COM AF12- Commission services' 2012 autumn forecast; COM SF12 - Commission services' updated 2012 spring forecast; SP – Stability Programme April 2012