Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Spain
Date: 2012-07-06
Institutions: European Commission
Subjects: Spain, autonomous community, budget deficit, budgetary equilibrium, economic recession, economic reform, stability programme

EUROPEAN COMMISSION 

Brussels, 6.7.2012  
COM(2012) 397 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Spain 

{SWD(2012) 215 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Spain 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union  (TFEU),  and  in 
particular Article 126(7) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  126  of  the  TFEU  Member  States  shall  avoid  excessive 
government deficits. 

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. 

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 Council 
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  decided  to  adopt  a  revised  recommendation  under  Article  126(7)  TFEU  to 
correct  the  excessive  deficit  by  2013  at  the  latest.  In  order  to  bring  the  headline 
government deficit below the 3% of GDP reference value by 2013 an average annual 
fiscal effort of 'above 1.5% of GDP' over the period 2010-2013 was recommended. In 
calculating  the  average  annual  fiscal  effort,  the  2011  deficit  in  the  Commission 
services’ 2009 Autumn Forecast was taken as the starting point. The total fiscal effort 
needed to reach the nominal deficit target of 3% by the deadline was then calculated 
by assuming a gradual closure of the output gap by 2015. 

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(5) 

(6) 

(7) 

(8) 

(9) 

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.  

According to Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on 
a  recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under 
Article  126(7)  TFEU,  if  effective  action  has  been  taken  and  unexpected  adverse 
economic  events  with  major  unfavourable  consequences  for  government  finances 
occur  after  the  adoption  of  that  recommendation.  The  occurrence  of  unexpected 
adverse economic events with major unfavourable budgetary effects shall be assessed 
against the economic forecast underlying the Council recommendation. 

In  accordance  with  Article  126(7)  of  the  TFEU  and  Article  3  of  Council  Regulation 
(EC)  No  1467/97,  the  Council  is  required  to  make  recommendations  to  the  Member 
State  concerned  with  a  view  to  bringing  the  situation  of  excessive  deficit  to  an  end 
within  a  given period.  The  recommendation has to establish a maximum deadline of 
six months for effective action to be taken by the Member State concerned to correct 
the excessive deficit. Furthermore, in a recommendation to correct an excessive deficit 
the Council should request the achievement of annual budgetary targets which, on the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark.  

After  recording  a  significant  contraction  in  2009,  when  real  GDP  fell  by  3.7%,  the 
economy  continued  contracting  in  2010,  albeit  by  a  mere  -0.1%.  The  economy 
returned to positive economic growth in 2011 (0.7%), supported by the dynamism of 
Spanish exports, which were helped by the improving competitiveness of the Spanish 
economy,  and  the  contraction  of  imports,  in  line  with  the  weakness  of  domestic 
demand. However, according to the most recent update by Commission services' of the 
economic  outlook  in  Spain  for  2012-2013,  which  is  an  update  of  the  2012  Spring 
Forecast incorporating the fiscal measures taken in late May 2012 at regional level and 
latest  economic  and  budgetary  developments,  Spain  is  likely  to  fall  back  into 
recession, and record negative annual economic growth in both 2012 and 2013. Both 
private  and  public  sector  deleveraging  and  the  sizeable  unemployment  are  a  heavy 
drag on domestic demand. In addition, the weakening of the international environment 
is  preventing  external  demand  from  offsetting  the  weakness  of  domestic  demand, 
resulting in the contraction of the Spanish economy. 

The general government deficit reached 9.3% of GDP in 2010, down from 11.2% in 
2009.  The  improvement  in  the  budget  balance  was  driven  by  both  cuts  in  total 
expenditure  and  an  increase  in  total  revenues,  mainly  as  a  result  of  discretionary 
measures. In 2011, the deficit outturn was significantly worse than expected, 8.5% of 
GDP compared with a target of 6% of GDP. Spain informed Eurostat on 17 May 2012 
that the 2011 general government deficit may be revised up by around 0.4% of GDP 
due to new information on some expenditure items of the autonomous regions which 
had not been included in the March 2012 EDP notification. Around two thirds of the 
2011  budget  deviation  occurred  at  the  regional  level,  while  central  government  and 
social  security  recorded  much  smaller  slippages.  The  budget  deviation  was  mainly 
explained  by  weaker-than-expected  revenues  due  to  the  materialisation  of  a  less 

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favourable economic environment than foreseen in the 2011 stability programme and a 
less tax-rich growth composition, while expenditure overruns were limited. 

(10)  According to a Commission services' update of the 2012 Spring Forecast, the general 
government  deficit  is  projected  at  6.3%  of  GDP  in  2012,  which  compares  to  an 
expected deficit of 5.3% of GDP in the 2012 stability programme and the draft 2012 
budget  law.  The  latter  is  based  on  revenue-raising  measures  which  include  mainly 
increases in direct taxation, such as changes to income and corporate taxation, and a 
fiscal  amnesty.  Some  of  these  measures  have  been  announced  as  being  temporary, 
such as the increase in income tax (limited to 2012 and 2013), or will have a one-off 
impact, such as the change in the tax instalment system for corporate taxes in 2012 and 
the  fiscal  amnesty.  The  draft  budget  law  and  the  programme  foresee  that  total 
expenditure  declines  as  a  result  of  deep  cuts  in  both  capital  and  current  spending, 
including from savings in the areas of health care and education at regional level. The 
projected  deviation  from  the  target  in  2012  is  mainly  linked  to  expected  revenue 
shortfalls, especially in social security, and higher social expenditure, due to a worse 
macroeconomic  outlook,  a  less  tax-rich  growth  composition  and  a  stronger 
deterioration in the labour market. This budget forecast is still subject to major risks. A 
further  deepening  of  the  economic  crisis  and  implementation  risks  at  regional  level 
due to the fact that many budgetary measures will only apply to part of the year, could 
imply  an  even  larger  deviation.  The  necessary  ongoing  rebalancing  of  the  Spanish 
economy  from  non-tradables  to  tradables  also  implies  a  risk  of  economic  growth 
becoming less tax-rich. Very recent budgetary outcome figures for the first months of 
2012  point  to  continued  downward  pressure  on  revenues  and  indicate  a  need  to 
implement further structural measures without delay.  

(11)  According  to  the  Commission  services'  update  of  the  2012  Spring  Forecast,  on  the 
basis  of  unchanged  policies,  and  with  real  GDP  expected  to  shrink  by  0.3%  on  the 
previous year, the government deficit is projected at 6.1% of GDP in 2013 compared 
to the original target of 3% of GDP. The 2012 stability programme projects a sizeable 
increase  in  revenues  from  taxes  on  production  and  imports,  not  yet  underpinned  by 
concrete measures, which is also expected to be partially compensated by lower taxes 
on  labour.  The  programme  also  includes  –  so  far  not  fully  specified  –  cuts  on  the 
expenditure  side,  pertaining  in  particular  to  the  area  of  education  and  health  care  at 
regional  level.  For  2014  and  2015,  the  envisaged  further  consolidation  is  not  yet 
sufficiently  supported  by  measures  to  underpin  the  proposed  deficit  target  and  few 
concrete measures are included in the stability programme. 

(12)  The Commission services' update of the 2012 Spring Forecast shows that the structural 
deficit was 8.7%, 7.3% and 7.0% of GDP in 2009, 2010 and 2011 respectively. It is 
expected to reach 4.3% of GDP in 2012. This implies an average fiscal effort of 1.5% 
of GDP between 2010 and 2012, which is in line with the minimum required average 
annual  fiscal  effort  of  'above  1.5%'  of  GDP  specified  by  the  Council  in  2010-2013. 
Correcting  for  the  change  in  the  macroeconomic  scenario  between  the  projections 
underlying  the  Council  recommendations  of  2  December  2009  and  the  current 
forecast, the estimated average annual fiscal effort between 2010 and 2012 would be 
0.5 pp. of GDP higher. Spain has so far thus taken effective action as regards the path 
for the structural deficit up to 2012. 

(13)  According to the Commission services’ 2009 Autumn Forecast, which was underlying 
the  Council  recommendation  under  Article  126(7)  TFEU  of  2  December  2009,  the 

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Spanish  economy  was  expected  to  contract  by  0.8%  in  2010  and  to  grow  by  1%  in 
2011. The years 2012 and 2013 were beyond that forecast's horizon period, but under 
the  hypothesis  of  a  gradual  closure  of  the  large  negative  output  gap  by  2015,  higher 
growth than in 2011 was expected for 2012 and 2013. The outcome of real GDP for 
2010 and 2011 was slightly more positive than expected in the 2009 Autumn Forecast. 
Nevertheless, the composition of economic growth was less tax-rich than expected, as 
the  accumulated  contribution  of  domestic  demand  for  2010  and  2011  was  -2.7 
percentage points of GDP, compared to a forecast of -1.1 percentage points, due to the 
faster  than  expected  downsizing  of  the  non-tradable  sector.  The  results  from  the 
Commission services' update of the 2012 Spring Forecast for 2012 and 2013 show that 
the Spanish economy is likely to face significant headwinds, which were not expected 
in the 2009 Autumn Forecast. While the 2009 Autumn Forecast assumed growth rates 
of well over 1% per year in 2012 and 2013, the latest forecasts point to growth rates of 
-1.9% and -0.3%, respectively, on a no-policy change basis. Furthermore, the growth 
composition is likely to continue to be biased to net external demand, with continued 
negative effects on tax revenues. 

(14)  Gross  public  debt  rose  to  68.5%  of  GDP  in  2011,  and  according  to  the  Commission 
services’ update of the 2012 Spring Forecast it is expected to surge to 80.9% of GDP 
in 2012 and to 86.8% in 2013, based on a no-policy-change scenario, thus exceeding 
the Treaty reference value in all years. This increase in the debt ratio is mainly driven 
by  higher  interest  payments  and  to  a  lesser  extent  by  the  dynamics  of  the  primary 
deficit.  The  stock-flow  adjustment  is  sizeable  in  2012,  contributing  5.4  percentage 
points of GDP to the increase, and is linked to the plan to settle invoices of providers 
of public bodies and other outstanding operations. Risks related to the macroeconomic 
scenario and the budgetary targets, as well as to additional financial rescue measures, 
may contribute to a further increase in public debt.  

(15)  The  budgetary  position  has  deteriorated  substantially  compared  to  when  the  earlier 
Council  recommendation  was  framed,  due  to  a  worse-than-expected  economic 
outlook, which is also less tax-rich. Moreover, the sizeable contraction of the economy 
is  affecting  employment  and  unemployment  in  a  very  negative  way.  This  is  having 
negative  effects  on  both  the  revenue  and  expenditure  side,  with  a  shortfall  of  social 
contributions  and  higher  social  transfers.  Considering  all  these  factors,  and  given  in 
particular  the  marked  deterioration  in  the  fiscal  outlook  since  the  original  Council 
recommendation under Article 126(7) TFEU, an additional year for the correction of 
the excessive deficit would therefore be warranted.  

(16)  Granting  an  additional  year  for  the  correction  of  the  excessive  deficit  requires  the 
attainment of intermediate headline deficit targets of 6.3% of GDP for 2012, 4.5% of 
GDP for 2013 and 2.8% of GDP for 2014. On the basis of the Commission services' 
update  of  the  2012  Spring  Forecast,  the  underlying  required  improvement  in  the 
structural fiscal balance resulting from these headline targets is 2.7% of GDP in 2012, 
2.5% of GDP in 2013 and 1.9% of GDP in 2014. Given very recent fiscal outturn data 
for the first months of 2012, additional measures will be needed to achieve the deficit 
target in 2012. The situation will have to be monitored closely and further corrective 
action would have to be taken early on if further slippages were to materialise.  

(17)  Given  the  severe  market  pressure  on  Spanish  sovereign  debt,  there  is  a  need  to 
underpin the credibility of the consolidation effort by adopting the announced multi-
annual budget plan for 2013-14 by the end of July 2012. This would require specifying 

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in detail all the structural measures that are necessary to achieve the budgetary targets 
in  2013  and  2014,  and  accelerating  the  reduction  of  the  deficit  if  economic  or 
budgetary conditions turn out better than currently expected. The importance of taking 
timely  action  on  this  point  to  avoid  the  risk  of  future  slippages  warrants  the  shorter 
deadline of three months for taking effective action. 

(18)  On 10 July the Council adopted country-specific recommendations for Spain, the first 
of  which  was  based,  inter  alia,  on  the  assessment  of  Spain's  national  reform 
programme and Spain's stability programme for 2012-15. This recommendation calls 
for  strict  enforcement  of  the  Budget  Stability  Law  and  the  adoption  of  strong  fiscal 
measures  at  regional  level.  This  would  mitigate  the  risks  of  a  slippage  at  regional 
level. Given  the  decentralised  nature  of  Spain’s  public  finances,  a  strong  fiscal  and 
institutional  framework  is  essential.  This  framework  could  be  reinforced  also  by 
establishing an independent fiscal institution to provide analysis, advice and monitor 
fiscal policy. Given their recent poor track record, budgetary compliance by regional 
governments, together with a greater sensitivity of revenues to the ongoing structural 
adjustment,  the  uncertain  revenue  impact  of  the  fiscal  amnesty  and  potential  further 
financial rescue operations, pose risks to the budgetary strategy. 

(19) 

In parallel to the regular reviews of the financial recapitalisation programme for Spain 
referred to in the euro area summit statement of 29 June 2012, monitoring of progress 
on implementation of its EDP commitments will be carried out at an interval of three 
months. 

(20)  Spain  fulfils  the  conditions  for  the  extension  of  the  deadline  for  correcting  the 
excessive general government deficit as laid out in Article 3(5) of Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure, 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

The Spanish authorities should put an end to the present excessive deficit situation by 
2014. 

The  Spanish  authorities  shall  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, in order 
to  bring  the  headline  government  deficit  below  the  3%  of  GDP  reference  value  by 
2014,  based  on  the  Commission  services'  update  of  the  2012  Spring  Forecast.  The 
headline deficit targets should be 6.3% of GDP for 2012, 4.5% of GDP for 2013 and 
2.8% of GDP in 2014. 

The Spanish authorities should 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 end of July 2012, including a medium-term 
budgetary strategy, which fully specifies the structural measures that are necessary to 
achieve  the  correction  of  the  excessive  deficit  by  2014.  In  view  of  recent  fiscal 
outturn data for the first months of 2012, adopt without delay additional measures in 
2012 to ensure the fulfilment of the budgetary plans for 2012. Stand ready to adopt 
further  measures  should  risks  to  the  budgetary  plans  materialise.  Accelerate  the 
reduction of  the deficit in  2013  and 2014  if economic or budgetary conditions turn 
out better than currently expected.  

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(4) 

The Council establishes the deadline of 3 months for the Spanish government to take 
effective action and, in accordance with Article 3(4a) of Council Regulation (EC) No 
1467/97, to report in detail the consolidation strategy that is envisaged to achieve the 
targets.  

Beyond  the  report  foreseen  in  recommendation  (4)  and  in  parallel  to  the  financial 
recapitalisation programme referred to in the euro area summit statement of 29 June 2012, the 
Spanish  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations  every  three  months  as  well  as  in  a  separate  chapter  in  the  stability 
programmes which will be prepared until 2015. 

Furthermore, the Spanish authorities should strictly apply the new provisions of the Budgetary 
Stability  Law  regarding  transparency  and  control  of  budget  execution.  In  line  with  the 
country-specific  recommendations  under  the  European  Semester,  the  Council  also  requests 
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. This recommendation is addressed to the Kingdom of Spain. 

Done at Brussels, 

For the Council 
The President 

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