Council opinion of 10 March 2009 on the updated stability programme of Spain, 2008-2011
Date: 2009-03-10
Institutions: Council of the European Union
Subjects: Spain, budget estimate, economic forecasting, public finance, stability programme

21.3.2009

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Official Journal of the European Union

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COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Spain, 2008-2011

(2009/C 68/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular
Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

On 10 March 2009, the Council examined the updated stability programme of Spain, which covers
the period 2008 to 2011.

According to the Commission services' January 2009 interim forecast, Spanish GDP growth would
have decelerated in 2008 to 1,25 % in real terms. Spain is facing domestic and external adjustment
challenges. Domestically, the housing sector is contracting, while the price of dwellings is falling.
Externally, the persistent current account deficit gap has lead to rapidly growing indebtedness,
resulting in rising interest payments abroad. Since the first half of 2008, the Spanish authorities have
adopted various measures to stimulate economic activity. They include temporary and permanent tax
cuts and investment projects, amounting to around 2 % of GDP in 2009, as well as a series of struc-
tural reforms. In addition to these discretionary measures, public finances are severely affected by the
economic downturn, which limits the space for further fiscal impulses without jeopardising a sound
long-term budgetary position. Therefore, Spain is facing the challenge of enhancing potential growth
in a protracted downturn, while facilitating the ongoing correction of the existing macroeconomic
imbalances.

The macroeconomic scenario underlying the programme envisages that GDP will contract by 1,6 %
in real terms in 2009 and recover in 2010 and 2011 with real GDP growth at 1,2 % and 2,6 %
respectively. The acceleration would mainly be driven by domestic demand, while the external deficit
is projected to decline from above 9 % of GDP in 2008 to 5,5 % in 2011. The programme takes into
account the stimulus measures adopted in response to the economic downturn, but does not present
explicit estimates of their impact on real GDP growth. Assessed against currently available informa-
tion (2), this scenario appears to be based on slightly favourable growth assumptions for 2009 and
markedly favourable thereafter. On the back of a reduction in the balance of goods and services
deficit, the programme envisages a decline of the external deficit from 9,2 % of GDP in 2008 to 5,4 %
of GDP in 2011.

For 2008, general government deficit is estimated at 3,4 % of GDP (3) in the Commission services'
January 2009 interim forecast, in line with the figure contained in the updated stability programme.
However, this is much lower than the target of a surplus of 1,2 % of GDP set in the previous update.
The budgetary deterioration results from both discretionary measures and a much weaker economic
activity. The fall of direct tax revenue reflects a combination of personal and corporate tax cuts and a
significant fall in corporate profits, linked to feeble asset markets, including real estate.

(1) OJ L 209, 2.8.1997, p. 1. The documents referred to in this text are available at:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2) The assessment notably takes into account the Commission services' January 2009 interim forecast, but also other infor-

mation that has become available since then.

(3) In view of the reported breach of the Treaty reference value, the Commission prepared on 18 February 2009 a report

under Article 104(3) of the Treaty.

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Indirect tax revenue fell due to the deceleration in consumer spending and particularly to the contrac-
tion of transactions in dwellings, as well as revenue-reducing measures of a one-off nature, such as
changes to VAT payments and returns. Expenditure overruns reflect in particular the working of auto-
matic stabilisers through higher social transfers, including unemployment benefits.

(5)

(6)

(7)

The update plans a budget deficit of 5,8 % of GDP in 2009, against a projection of 6,2 % in the
Commission services' interim forecast. The worsening of the budget balance is explained by the adop-
tion of a number of discretionary measures amounting to around 2 % of GDP, but also by the
working of automatic stabilisers in response to the economic downturn (estimated at around 1 % of
GDP). The discretionary measures include the November 2008 stimulus package (slightly above 1 %
of GDP). The package foresees the creation of a Central Government Fund for Local Public Invest-
ment, endowed with 0,75 % of GDP, with the aim of carrying out new public works. Revenue-redu-
cing one-off measures amount to around 0,75 % of GDP, including the modification of the system
for VAT returns and the reduction in personal income withholding tax for tax payers with mortgages.
Overall, the stance of fiscal policy will be expansionary in 2009 and in line with the recommendation
of the EERP.

After peaking in 2009, the headline deficit is expected to fall to below 4 % of GDP in 2011. Similarly,
the primary balance will reach a deficit of 1,9 % of GDP by 2011, which compares with a deficit of
4,1 % in 2009. In structural terms, the government deficit will increase from 3,5 % of GDP in 2008
to 4,75 % in 2009 reflecting the budgetary impact of discretionary measures, but also the fall in
revenue related to the on-going adjustment in the real estate sector. This excludes the 0,75 percentage
points of GDP of one-off revenue-reducing measures included in the 2009 budget.

The update sets up a fiscal adjustment path, projecting improvements in the structural balance of
1,25 % and slightly above 0,5 % of GDP in 2010 and 2011 respectively. As a result, the programme
envisages a reduction in the structural deficit to 2,75 % in 2011 (1). According to the programme,
the goal of this adjustment is to regain the medium-term budgetary objective (MTO) of a balanced
position, but it is not expected to be met within the programme period. The improvement in 2010
can partly be explained by the temporary nature of the stimulus package adopted in November 2008.
Apart from this, the programme does not spell out measures underpinning the projected decline in
the structural balance. Government gross debt, estimated at 39,5 % of GDP in 2008, is projected to
increase by approximately 14 points over the programme period. In addition to the rise in the deficit
and the decline in GDP growth, the acquisition of assets from banks within the framework of the
financial rescue package contributes to the rise in the debt ratio, mainly in 2009.

The budgetary outcomes are subject to downside risks throughout the programme period. First, the
macroeconomic scenario projected in the update appears to be based on favourable growth assump-
tions, particularly for the outer years of the programme. Second, budgetary targets for 2010 and
2011 are not backed up by measures, other
the
November 2008 package. Moreover, regional and local governments are allowed to incur deficits
in 2009 without the usual obligation of presenting a rebalancing plan, in line with the Budgetary
Stability Act which allows for this exemption when real economy activity departs substantially from
the initial forecasts. The evolution of the debt ratio may be less favourable than projected in the
update, given the risks to the macroeconomic scenario and the budgetary targets, and the uncertainty
about the impact of the guarantees granted in the context of the financial rescue package. However,
the increase in debt linked to the measures taken in support of the financial sector would be reversed
if the support scheme and the financial operations linked to it are successful.

than the announced discontinuation of

(1) Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-
offs and other temporary measures applied by the Commission services, the structural balance would be – 3,1 % of GDP
in 2008, – 4,1 in 2009, and – 3,4 in 2010.

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(8)

(9)

(10)

(11)

The long-term budgetary impact of ageing is well above the EU average, mainly as a result of a rela-
tively high increase in pension expenditure as a share of GDP over the coming decades. While the
strong budgetary position until 2007 contributed to partly offsetting the projected long-term
budgetary impact of ageing populations, the contrary would result from the budgetary developments
projected in the programme. Also, if the 2009 budgetary position as projected by the Commission
services' interim forecast is to be taken as the starting point, the sustainability gap would widen
substantially in relation to the last update. Improving the primary balance over the medium term and
implementing further structural measures aimed at curbing the substantial
increase in age-related
expenditures would contribute to reducing the high risks to the long-term sustainability of public
finances.

The medium-term budgetary framework has been instrumental in promoting an appropriate fiscal
planning and shows an overall good track record, although the latter has worsened since 2008. No
reforms to this framework are planned. However, the programme outlines several reforms aimed at
improving the quality of public finances. On the revenue side, these include a reduction in the tax
burden on earned income through a personal income tax credit of up to EUR 400 per taxpayer, a
mechanism for advancing the tax credit for mortgage payments, the elimination of wealth tax and the
second phase of the corporate income tax reform, as well as measures aimed at improving the func-
tioning of the tax system, such as the possibility of obtaining VAT refunds on a monthly basis. On
the expenditure side, priority is being given to productive expenditure along with the need to rein in
intermediate public consumption. The programme underlines the role of the State Agency for the
Assessment of Public Policy and Service Quality as a step forward in the promotion of a culture of
assessment, which should enhance the efficiency and quality of public services.

The Spanish authorities have adopted a range of measures to stabilise the financial sector. This
includes an increase of the amount of the Deposit and Investment Guarantee Fund (from EUR 20 000
to EUR 100 000 per account holder and bank) and the creation of the Financial Asset Acquisition
Fund in order to promote lending to companies and individuals, endowed with EUR 30 billion (close
to 3 % of GDP), including the possibility of an expansion up to EUR 50 billion. Moreover, the autho-
rities decided to grant exceptional authorisations to the Ministry of Economy and Finance to award
State guarantees
in 2009 up to
for new funding transactions by Spanish-resident banks
EUR 100 billion (10 % of GDP), maturing between three months and three years, and to acquire secu-
rities issued by Spanish-resident banks in order to strengthen their own funds.

The Spanish government adopted significant discretionary fiscal measures in response to the
economic downturn. The stimulus package for 2009 is in line with the EERP agreed in December
2008 by the European Council and represents an adequate response to the economic downturn,
yielding a temporary support to economic activity in 2009. It mainly focuses on investment, house-
hold purchasing power, and business and SMEs. Measures amounting to around 1 % of GDP were
already planned in specific packages in April and August 2008, while the rest includes new actions
adopted in a fiscal impulse package presented in November 2008 (slightly above 1 % of GDP). This
November 2008 package is timely, targeted and temporary. They broadly respond to the main policy
objectives in terms of
the short-term outlook. The update also includes a series of structural
measures, which are part of the longer-term policy reform agenda, but help address the current chal-
lenges posed by the downturn. These measures are related to the medium-term reform agenda and
the country-specific recommendations proposed by the Commission on 28 January 2009 under the
Lisbon Strategy for Growth and Jobs. They aim at enhancing the growth potential, strengthen compe-
titiveness and employment as well as supporting incomes of disadvantaged groups, and include the
transposition of the services directive.

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(12)

The overall fiscal stance in the programme is expansionary in 2009 and mildly restrictive in 2010.
More specifically, the programme targets for 2010 a reversal of the 2009 fiscal expansion and a
further structural improvement in 2011. However, taking into account risks to the budgetary plans,
the reversal in 2010 requires further action to be effective. The programme projects the headline
deficit to remain above the 3 % of GDP reference value. The deficit reduction envisaged in the
programme for 2010 and beyond is not backed up by measures.

(13) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme contains gaps in the required and optional data (1).

The overall conclusion is that the sharp slowdown of economic activity and some discretionary measures
led to a deficit above 3 % of GDP in 2008, after a prolonged period in which the Spanish public finances
were close to balance or in surplus. The updated stability programme aims at a significant fiscal impulse
in 2009 in line with the EERP to counteract the continued slowdown in economic activity. This will lead to
a widening of the government deficit, while the debt ratio remains comfortably below 60 % of GDP.
Improving long-term fiscal sustainability should be a priority. The favourable macroeconomic assumptions
may imply a lower contribution of economic growth to fiscal consolidation than envisaged in the
programme, while the adjustment path is not fully backed up with concrete measures. In addition, fostering
the quality of public finances is important also with a view to underpinning a smooth adjustment of the
economy in the light of the imbalances it is faced with.

In view of the above assessment, Spain is invited to:

(i) implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the
SGP, while avoiding a further deterioration of public finances in 2009, and carry out with determination
significant structural consolidation in 2010 and beyond, backing it up with measures;

(ii) improve the long-term sustainability of public finances by implementing further measures aimed at

curbing the increase in age-related expenditure;

(iii) ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public

finances as planned in the light of the needed adjustment of existing imbalances.

Comparison of key macroeconomic and budgetary projections

2007

2008

2009

2010

2011

Real GDP
(% change)

SP Jan 2009

COM Jan 2009

3,7

3,7

1,2

– 1,6

1,2

2,6

1,2

– 2,0

– 0,2

n.a.

SP Dec 2007

3,8

3,1

3,0

3,2

n.a

HICP inflation
(%)

SP Jan 2009

n.a.

n.a.

n.a.

n.a.

n.a.

COM Jan 2009

2,8

4,1

0,6

2,4

n.a.

SP Dec 2007

2,7

3,3

2,7

2,8

n.a

(1) In particular, compulsory data on one-offs and other temporary measures (table 2), and optional data on HICP (table 1b),
labour productivity per hour worked (table 1c), general government expenditure by function (table 3), structural balance
(table 5) and detailed information on debt developments (table 4) — such as differences between cash and accruals in the
general government debt developments, net accumulation of financial assets, privatisation proceeds, valuation effects and
others, liquid financial assets, net financial debt — are not provided.

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2007

2008

2009

2010

2011

Output gap (1)
(% of potential GDP)

SP Jan 2009

COM Jan 2009 (2)

1,4

1,5

0,3

0,8

– 2,6

– 3,2

– 2,7

– 2,3

– 3,4

Net lending/borrowing
vis-à-vis the rest of the
world
(% of GDP)

General government
revenue
(% of GDP)

General government
expenditure
(% of GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance (1)
(% of GDP)

n.a.

n.a

SP Dec 2007

– 0,9

– 1,4

– 1,9

– 1,6

SP Jan 2009

– 9,7

– 9,2

– 6,6

– 5,8

– 5,4

COM Jan 2009

– 9,7

– 9,0

– 6,7

– 6,2

SP Dec 2007

– 9,0

– 8,9

– 8,8

– 8,7

n.a.

n.a

SP Jan 2009

41,0

37,0

37,5

38,3

38,7

COM Jan 2009

41,0

36,8

36,4

36,9

SP Dec 2007

40,800

40,4

40,4

40,3

n.a.

n.a

SP Jan 2009

38,8

40,4

43,3

43,1

42,6

COM Jan 2009

38,8

40,2

42,6

42,5

SP Dec 2007

39,0

39,2

39,2

39,1

n.a.

n.a

SP Jan 2009

COM Jan 2009

SP Dec 2007

SP Jan 2009

COM Jan 2009

SP Dec 2007

SP Jan 2009

COM Jan 2009

SP Dec 2007

2,2

2,2

1,8

3,8

3,8

3,4

1,6

1,6

2,2

1,6

1,6

2,2

– 3,4

– 5,8

– 4,8

– 3,9

– 3,4

– 6,2

– 5,7

1,2

1,2

1,2

n.a.

n.a

– 1,9

– 4,1

– 2,9

– 1,9

– 1,8

– 4,6

– 4,0

2,7

2,6

2,6

n.a.

n.a

– 3,5

– 4,7

– 3,4

– 2,8

– 3,7

– 5,2

– 4,2

1,8

2,0

1,9

n.a.

n.a

– 3,5

– 4,7

– 3,4

– 2,8

– 3,3

– 4,6

– 4,2

1,8

2,0

1,9

n.a.

n.a

Structural balance (3) (4)
(% of GDP)

SP Jan 2009

COM Jan 2009

SP Dec 2007

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Government gross debt
(% of GDP)

SP Jan 2009

COM Jan 2009

SP Dec 2007

2007

36,2

36,2

36,2

2008

39,5

39,8

34,0

2009

47,3

46,9

32,0

2010

51,6

53,0

30,0

2011

53,7

n.a.

n.a

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) Based on estimated potential growth of 3,0 %, 1,8 %, 1,0 % and 0,9 % respectively in the period 2007-2010.
(3) Cyclically-adjusted balance excluding one-off and other temporary measures. No one-offs are included in the most recent programme.
One-off and other temporary measures are below 0,5 % of GDP in 2008 and above 0,5 % in 2009, all deficit-increasing, are included
in the Commission services' January 2009 interim forecast.

(4) Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-offs and other
temporary measures applied by the Commission services, the structural balance would be – 3,1 % of GDP in 2008, – 4,1 % in 2009,
and – 3,4 % of GDP in 2010.

Source:
Stability programme (SP); Commission services' January 2009 interim forecast (COM); Commission services' calculations.