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July 27, 2016

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Symbolic but stinging deficit fine for Spain and Portugal

The European Commission will today announce its decision on Spain's and Portugal's deficit fines. El País has seen a draft for discussion by the Commissioners, according to which Spain will receive a symbolic - but non-zero - fine and get an extra year to meet the deficit targets in exchange for stiff demands for structural adjustment in 2017 and 2018 and a withdrawal of structural funds unless a credible budget is presented for 2017. The Commission takes the present year as lost to deficit reduction given Spain's inability to move beyond a caretaker government. The country will also be subjected to enhanced budget monitoring. Spain's fines will set the tone for Portugal's, though the Commission recognises the situation there is different. Portugal is closer than Spain to meeting the deficit targets, so it will get only one extra year to meet the target, but the Commission believes even Spain has made more structural reforms.

The size of the fine is almost the only detail still under discussion. It can, according to the rules, be up to 0.2% of GDP. The extreme options of no fine at all - preferred by Pierre Moscovici according to El País - or a maximum fine have both been discarded. Valdis Dombrovkis reportedly proposed a 0.1% GDP fine, but has been asked to prepare a new proposal with a fine below 0.05% as Jean-Claude Juncker favours a symbolic fine of 0.01% to 0.02% of GDP. Given the Spanish government's continued insistence that there would be no fines, lately claiming that Germany sides with France and Italy in opposing them, any fine would be perceived as a political humiliation. 

The structural budget adjustment the Commission will demand from Spain is 0.5% of GDP in 2017 and 2018. The Commission does not appear to be impressed by the latest increase in advance corporate tax payments and will demand real permanent budget changes not linked to the business cycle or to accounting. If the 2017 budget does not include "effective measures" Spain faces a hike in the possible fines to 0.5% of GDP. The Commission has noted a recent report by Spain's independent fiscal authority Airef forecasting a deficit of 4.7% this year without further measures. The deficit targets for 2017 and 2018 are likely to be tightened to 3.5% and 2.5% of GDP respectively.

Coincidentally, just yesterday dismal figures for Spain's budget were released for the year until May. The public sector deficit grew 13% from last year to this year, and already exceeds the target for the whole year, reports El País. It is already over €26bn. The main reason for this is that revenues fell over 6% to May, which is not compensated by a 2.9% spending reduction. Another reason, which is a one-off but surely to be controversial, is a €1bn recapitalisation of the Sareb bad bank, previously unreported. Meanwhile, regional governments have reduced their deficit by a quarter, in part because of increased transfers from the central government but also because they are increasing their revenue faster than their expenses. Local authorities will continue to report a surplus.

Portugal's budget execution looks much better, but this is due mostly to a reduction in public investment. Total expenditure is up while tax revenues are growing below expectations, reports Observador. The first semester deficit dropped by €971bn, or more than one quarter the comparable figure last year. Economic recovery has led to tax revenues increasing by 2.7% yoy for the six-month period, but this is below the 3.5% increase budgeted by the government.

Our other stories

We also have stories on the hard versus soft Brexit divide inside Theresa May’s cabinet; how France and Germany are responding to an unprecedented wave of terror; on how a state guarantee can be counterproductive; on ND’s failed attempt to get an inquiry into the third Greek bailout; and some thoughts on the future the EU.

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