Recommendation for a

COUNCIL DECISION

giving notice to Spain to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(9) thereof,

Having regard to the recommendation from the European Commission,

Whereas:

(1)According to Article 126 of the Treaty on the Functioning of the European Union (TFEU), Member States shall avoid excessive government deficits.

(2)The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. The Stability and Growth Pact includes Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, which was adopted in order to further the prompt correction of excessive general government deficits.

(3)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) of that Treaty. Since then, the Council has issued three new recommendations to Spain (on 2 December 2009, 10 July 2012 and 21 June 2013) on the basis of Article 126(7) TFEU, which extended the deadline for correcting the excessive deficit to 2013, 2014 and 2016 respectively. In all three recommendations, the Council considered that Spain had taken effective action, but unexpected adverse economic events with major unfavourable consequences for government finances had occurred.

(4)According to the provisions of Article 126(8) of the Treaty, the Council decided on 12 July 2016 that Spain did not take effective action in response to the Council Recommendation of 21 June 2013.

(5)According to Article 10(2) of Regulation (EC) No 1467/97, if action by a participating Member State is not being implemented or, in the Council's view, is proving to be inadequate, the Council shall immediately take a decision under Article 126(9) of the Treaty.

(6) The Commission has updated its 2016 spring forecast with information available until 19 July 2016. On this basis, the real GDP growth forecast for 2016 has been revised upwards by 0.3 percentage points in comparison to the spring forecast, to 2.9%, and downwards for 2017 (2.3% vs. 2.5% in spring). For 2018, real GDP is forecast to grow by 2.1%. This compares to growth of 3.2% in 2015. Economic growth is therefore set to ease but to remain robust, still benefitting from reforms undertaken in response to the crisis and the successful completion of the financial assistance programme. The recovery continues to be accompanied by strong job creation, in a context of continued wage moderation and benefitting from the labour market reforms. Low oil prices also support growth. At the same time, inflation is expected to be −0.3% in 2016. There are, however, downside risks to the growth forecast, especially as from 2017, related among others, to the outcome of the referendum in the United Kingdom on the membership of the European Union, which has increased uncertainty, with potential negative implications for trade and domestic demand.

(7)According to the updated Commission 2016 spring forecast, the general government deficit is expected to narrow to 4.6% of GDP in 2016, 3.3% of GDP in 2017 and 2.7% of GDP in 2018 (compared to Stability Programme targets of 3.6%, 2.9% and 2.2% of GDP in 2016, 2017 and 2018, respectively and a projected deficit outcome of 3.9% of GDP in 2016 and 3.1% of GDP in 2017 in the spring forecast). The higher deficit forecast is due partly to the fact that the updated Commission forecast takes on board a lower amount of measures to contain expenditure at central and regional government level in response to the March 2016 Commission Recommendation (0.2% of GDP) than the Stability Programme forecast (0.4% of GDP) on account that some of these measures have not yet been sufficiently specified to be included in the Commission forecast on the basis of the usual no-policy-change assumption. However, most of the difference stems from changes made to the corporate income tax legal framework, leading to lower advanced payments by companies ('pagos fraccionados') in 2016. The shortfalls in advanced payments were not quantified in the Stability Programme and only became apparent in April, at the time of the first instalment, after the cut-off date of the spring forecast. The updated Commission 2016 spring forecast estimates these shortfalls at 0.5% of GDP in 2016. As the abovementioned changes create a permanent delay in the payment of taxes, but not to a change in the tax rate or tax base, they would not affect revenue from corporate income taxes in a new steady state (starting in 2017). They result in a temporary loss of tax collection in 2016, which has been treated as a one-off in the updated spring forecast. For 2017, the differences between the updated spring forecast and the Stability Programme stem from the worse-than-expected starting position and the fact that the savings measures taken in response to the March 2016 Commission Recommendation are not yet sufficiently specified to be taken into account on the basis of the usual no-policy-change assumption. The structural deficit is expected to increase by 0.4% and 0.1% of GDP in 2016 and 2017, respectively, and to remain unchanged in 2018. However, in 2016, the projected increase of the structural deficit is partly driven by the fact that the current outlook for inflation and nominal GDP growth is lower than the one underpinning the 2016 budget, which adversely affected structural government revenue while not allowing to adjust expenditure.

(8)The general government gross debt-to-GDP ratio rose from 36% in 2007 to about 99% in 2014. In 2015, the debt ratio was more or less stable, as net sales of financial assets offset the negative impact of the deficit growing faster than nominal GDP growth. According to the updated Commission 2016 spring forecast, the debt ratio is expected to peak at 100.6% of GDP in 2017, whereas the spring forecast projected the debt to peak at 100.3% of GDP in 2016. Although Spain does not appear to face immediate risks of fiscal stress arising from this high debt ratio, debt-sustainability risks will significantly increase in the medium term if the budgetary position is not improved. In the longer term, risks to fiscal sustainability are set to be reduced thanks to the positive impact of reductions in age-related expenditure.

(9)According to Article 5 of Regulation (EC) No 1467/97, in the Council decision to give notice to take measures for the deficit reduction in accordance with Article 126(9) of the Treaty, the Council shall request that the Member State achieve annual budgetary targets which, on the basis of the forecast underpinning the notice, are consistent with a minimum annual improvement of at least 0.5% of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures. However, the fact that this Council decision to give notice is adopted in the second half of the year amplifies the fiscal effort needed to achieve a given annual improvement of the structural balance. It is also important to bear in mind that the baseline scenario for the new adjustment path starts with a deterioration of 0.4% of GDP of the structural deficit, which is at least in part the result of the inflation turning out lower than projected in the scenario underpinning the 2016 budget – an event that is largely outside the control of the government. Taking this into account, it appears appropriate not to request further structural measures in 2016.

(10)Considering that no further structural measures should be requested in 2016, granting Spain one additional year for the correction of its excessive deficit, which is the rule according to Council Regulation (EC) No 1467/97, would require an annual improvement of the structural balance in 2017 which would have a too negative impact on growth. Therefore, it seems adequate to extend the deadline for Spain to bring an end to its excessive deficit situation by two years.