COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Spain following the adoption of the COUNCIL RECOMMENDATION to Spain of 2 December 2009 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document 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  
SWD(2012) 215 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Spain following 
the adoption of the COUNCIL RECOMMENDATION to Spain of 2 December 2009 
with a view to bringing an end to the situation of an excessive government deficit 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

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

{COM(2012) 397 final} 

EN 

   EN 

 
 
 
 
  
 
 
1. 

INTRODUCTION  

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  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term 
framework. To this end, the Spanish authorities had to: (a) implement the significant deficit 
reducing  measures  in  2010  planned  in  the  draft  2010  Budget  Law;  (b)  ensure  an  average 
annual improvement in the structural budget balance of above 1.5% of GDP over the period 
2010-2013,  which  should  also  contribute  to  halting  the  rapid  rise  of  the  government  gross 
debt  ratio,  which  was  forecast  to  breach  the  reference  value;  (c)  specify  the  measures  that 
were necessary to achieve the correction of the excessive deficit by 2013, cyclical conditions 
permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary  conditions 
turn out better than currently expected. 

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. 

2. 

EFFECTIVE ACTION  

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  and  the 
contraction of imports, in line with the weakness of domestic demand. However, according to 
the most recent Commission services' forecasts for 2012 and 2013, which is an update of the 
2012  Spring  Forecast  incorporating  the  fiscal  measures  taken  in  late  May  2012  at  regional 
level  and  the  latest  economic  and  budgetary  information,  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  a  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  compared  to  2009  was  driven  by  both  cuts  in  total 
expenditure  and  an  increase  in  total  revenues,  mainly  as  a  result  of  discretionary  measures. 
These included among other things a cut of 5% in public-sector wages, a pension freeze and 
an increase in the VAT rate. 

EN 

2 

   EN 

 
In  2011,  Spain  adopted  further  discretionary  measures  on  top  of  those  already  adopted  in 
2010,  which  included  an  increase  in  excise  taxes,  the  withdrawal  of  the  National  Fund  for 
Employment and Local Sustainability and a phasing out of some subsidies, including housing 
subsidies. However, the deficit outturn was significantly worse than expected, 8.5% of GDP 
compared  with  a  target  of  6%.  The  Spanish  authorities  informed  Eurostat  on  17  May  2012 
that the 2011 general government deficit may be revised up by around 0.4% of GDP (from 8.5 
to  8.9%  of  GDP)  due  to  new  information  on  some  expenditures  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  favourable  economic 
environment  than  foreseen  in  the  2011  stability  programme  and  a  less  tax-rich  growth 
composition, while expenditure overruns were relatively limited. 

For 2012, Spain is implementing additional discretionary measures, which include increases 
in  both  the  personal  income  tax  and  the  corporate  tax,  a  fiscal  regularisation,  measures  to 
reduce tax fraud, and higher property tax. On the expenditure side, measures include cuts in 
spending on education and health care, reductions in capital transfers and deep cuts in current 
and  capital  spending  by  ministries.  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. 

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 a deficit target of 
5.3% of GDP in the 2012 stability programme and the draft 2012 budget law. 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  the 
labour market deterioration, a greater sensitivity of revenues to the economic adjustment and 
implementation risks at regional level also due to the fact that many budgetary measures will 
only  apply  to  part  of  the  year,  could  imply  an  even  larger  deviation.  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. 

According to the most recent Commission services' forecast, which is an update of the 2012 
Spring Forecast incorporating the fiscal measures taken in late May 2012 at regional level, the 
structural deficit was 8¾%, 7.¼% and 7% of GDP in 2009, 2010 and 2011, respectively. It is 
expected  to  reach  4.3%  of  GDP  in  2012.  This  requires  an  average  improvement  of  the 
structural  balance  of  1.5%  of  GDP  between  2010  and  2012,  which  is  in  line  with  the 
minimum required average annual improvement of 'above 1.5%' of GDP stipulated over the 
period  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  adjusted  average  annual  improvement  in  the  fiscal  balance  between  2010  and 
2012 would be 0.5 pp. of GDP higher. 

EN 

3 

   EN 

 
3. 

RECENT MACRO-ECONOMIC AND BUDGETARY DEVELOPMENTS 

In 2011, the Spanish economy returned to positive economic growth (0.7%) after two years of 
contraction (-3.7% in 2009 and -0.1% in 2010). The recovery was driven by net trade, with 
Spanish  exports  growing  by  9%  in  real  terms,  while  imports  were  flat  as  domestic  demand 
contracted  sharply  (-1.8%  in  2011  compared  to  -1%  in  2010).  Private  consumption  and 
investment were held back by the high level of unemployment (24.4% in the first quarter of 
2012), the deleveraging process of households and corporations seeking to reduce their high 
indebtedness (82% of GDP for households, 132% of GDP for non-financial corporations) and 
the lack of credit, due to the financing difficulties of the Spanish MFIs. 

The expected slowdown of global economic growth in 2012 implies a weakening of the only 
source  of  growth  for  the  Spanish  economy,  i.e.  exports.  On  the  domestic  demand  side,  the 
same  factors  that  weighed  on  private  consumption  and  investment  in  2011  will  continue 
acting  as  a  drag  in  2012.  Furthermore,  the  fiscal  consolidation  efforts  that  the  Spanish 
government  needs  to  conduct  to  put  its  public  finances  on  a  sound  footing  are  also  holding 
back economic growth in the short term. As a result, the update of the Commission services' 
2012 Spring Forecast estimates that Spain is likely to fall back into recession, with negative 
real  GDP  growth  in  both  2012  and  2013.  GDP  is  expected  to  fall  by  1.9%  in  2012  and  by 
0.3% in 2013 (under a no-policy change assumption). According to this forecast, net external 
demand  would  continue  to  contribute  positively  to  GDP  growth  in  2012,  but,  in  contrast  to 
2011,  is  likely  to  be  driven  by  a  fall  in  imports.  Domestic  demand  is  expected  to  contract 
sharply (-4.5%). 

Table 1. Forecast of key macroeconic and budgetary variables 

2009

2010

2011

2012

2013

2014

Real GDP growth

-3.7

-0.1

0.7

-1.9

-0.3

1.1

Output gap 
(% of potential output)
General government balance 
(% of GDP)
Structural balance1 
(% of GDP)

-4.3

-4.8

-11.2

-9.3

-4.2

-8.9

-5.3

-6.3

-4.7

-2.8

-6.1

-6.4

-8.7

-7.3

-7.0

-4.3

-4.1

-5.1

Notes: 
1 Cyclically-adjusted balance excluding one-off and other temporary measures.
Source : 
Commission services’ 2012 spring forecast update, based on no policy change

The  outcome  for  the  years  2010  and  2011  was  slightly  better  than  expected  in  the 
Commission services' 2009 Autumn Forecast. Indeed, the 2009 Autumn Forecast, which was 
underlying the Council recommendation under Article 104(7) of 2 December 2009, estimated 
that  the  Spanish  economy  would  contract  by  0.8%  in  2010  and  grow  by  1%  in  2011.  The 
observed  real  GDP  growth  was  actually  slightly  stronger,  with  real  GDP  increasing  by  0.6 
percentage  points  over  the  whole  period.  This  was  a  result  of  a  larger-than-expected 
contribution from net external demand, due to a fall in imports but also better-than-projected 
export  growth,  which  partly  reflects  the  underlying  improvement  in  competitiveness.  The 
accumulated  contribution  to  GDP  growth  from  domestic  demand  was  much  weaker,  -2.7 
percentage  points  compared  to  a  forecast  of  -1.1  percentage  points,  which  is  a  typical 

EN 

4 

   EN 

 
 
phenomenon  when  growth  is  rebalanced  towards  the  tradable  sector.  As  result  of  the  GDP 
mix, the evolution of the tax base was worse than expected and the revenue-raising capacity 
of the Spanish government was constrained. 

The update of the Commission services' 2012 Spring Forecast implies a much more adverse 
scenario for the years 2012 and 2013 than the one implied by the Commission services' 2009 
Autumn Forecast, which was based on an assumption of closure of the output gap beyond the 
forecast horizon. Hence, that forecast exercise implicitly assumed that the Spanish economy 
would grow at a faster pace than in 2011 in both these years in order for the output gap to be 
closed.  However,  the  current  forecast  projects  economic  activity  to  contract  significantly  in 
2012 and continue to fall, albeit slightly, in 2013 (on a no-policy change basis). In addition to 
this deterioration of more than 3 percentage points in the growth outlook, the composition of 
growth is expected to differ markedly. While in the 2009 Autumn Forecast domestic demand 
was  expected  to  show  positive  growth  in  2011,  and  implicitly  in  the  following  years,  the 
current  forecast  foresees  significant  falls  (-4.5%  for  2012  and  -2.1%  for  2013),  implying  a 
significant weakening of the tax base and, thus, of tax revenues. 

According  to  the  updated  Commission  services'  2012  Spring  Forecast,  which  is  based  on  a 
no-policy-change  assumption  and  which  forecasts  real  GDP  growth  to  shrink  by  0.3%  in 
2013, the government deficit is forecast to reach 6.1% of GDP in that year, compared to the 
original target of the government of 3% of GDP. For 2013, the stability programme projects a 
sizeable increase in revenues from taxes on production and imports, not yet underpinned by 
concrete measures, which is expected to be partially compensated by lower taxes on labour. 
The programme also includes – so far not sufficiently 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. 

Public debt rose to 68.5 % of GDP in 2011, and according to the updated Commission 2012 
Spring  Forecast,  it  is  expected  to  surge  to  80.9%  of  GDP  in  2012  and  continue  to  rise  to 
86.8%  in  2013,  based  on  a  no-policy-change  scenario,  thus  exceeding  the  Treaty  reference 
value in all years. This increase in debt 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 debt increase, and is linked to the plan 
to  settle  invoices  of  providers  of  public  bodies  and  other  outstanding  operations.  Downside 
risks  related  to  the  macroeconomic  scenario  and  the  budgetary  targets,  as  well  as  to  the 
additional  re-financing  needs  of  the  financial  sector,  may  contribute  to  a  further  increase  in 
public debt.  

Downside  risks  to  the  budgetary  targets  in  2012  and  beyond  are  linked  in  particular  to  a 
possible stronger contraction of the economy, a less tax-rich composition of growth, stronger 
sensitivity of revenues to the structural adjustment of the Spanish economy, the recently poor 
track  record  of  regions  in  meeting  their  budgetary  targets,  and  insufficient  specification  of 
measures to underpin targets (from 2013 onward). 

4. 

PROPOSED NEW ADJUSTMENT PATH 

The  substantial  deterioration  in  the  budgetary  position  resulting  from  the  adverse  economic 
developments, which also turned out less tax-rich than expected, compared to when the earlier 

EN 

5 

   EN 

 
Council recommendation was framed, warrants an extension of the deadline for correction of 
the excessive deficit in Spain to 2014. In particular, the sizeable contraction of the economy 
has  affected  employment  in  a  very  negative  way  and  unemployment  has  risen  sharply. 
Together with the changing composition of GDP growth, this has had adverse effects on both 
the  revenue  and  expenditure  side,  with  a  short-fall  of  social  contributions  and  higher  social 
transfers. Considering all these factors, an additional year would therefore be warranted.  

Granting  an  additional  year  in  the  correction  of  the  excessive  deficit  gives  intermediate 
headline deficit targets of 6.3% of GDP for 2012, 4.5% of GDP for 2013 and 2.8% of GDP 
for  2014.  The  underlying  improvement  in  the  structural  budget  balance  implied  by  these 
targets is 2.7% of GDP in 2012, 2.5% of GDP in 2013 and 1.9% in 2014. These targets for the 
annual improvement in the structural budget balance take into account the need to compensate 
for  the  negative  second-round  effects  of  fiscal  consolidation  on  public  finances,  through  its 
impact on GDP growth. The previous EDP correction deadline of 2013 required an average 
annual improvement in the structural budget balance of above 1.5% of GDP over the period 
2010-2013.  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. 

Table 2. Key budgetary and macroeconomic variables according to the new 
intermediate targets

2009

2010

2011

2012

2013

2014

General government balance 
(% of GDP)
Structural balance1 
(% of GDP)

Structural effort
Real GDP growth

-11.2

-9.3

-8.9

-6.3

-4.5

-2.8

-8.7

-3.7

-7.3

1.4

-0.1

-7.0

0.3

0.7

-4.3

2.7

-1.9

-1.8

2.5

-2.1

0.1

1.9

-1.1

Notes: 
1 Cyclically-adjusted balance excluding one-off and other temporary measures.
Source : 
Commission services

EN 

6 

   EN 

 
 
5. 

CONCLUSIONS 

On current information, the Spanish authorities have taken measures that represent an average 
annual  improvement  in  the  structural  budget  balance  of  1.5%  over the  period  2010-2012  in 
line with Council Recommendations. 

For  the  period  2012-2013,  the  Spanish  authorities  have  outlined  in  some  detail  plans  for  a 
correction  of  the  excessive  deficit  situation  by  2013,  as  recommended  by  the  Council. 
According  to  the  stability  programme,  total  revenue-raising  measures  of  2.3%  of  GDP  are 
planned in 2012, of which more than three fourths (1.8% of GDP) have already been adopted. 
Total  expenditure  is  expected  to  decline  by  1.2%  of  GDP  in  2012,  underpinned  by  cuts  in 
ministerial spending levels.  

The substantial deterioration in the budgetary position resulting from the worse-than-expected 
economic downturn and the weaker overall position of the economy than envisaged when the 
earlier Council recommendation was framed suggest that a new deadline for correction of the 
excessive deficit in Spain by 2014 is appropriate. Granting an additional year in the correction 
of the excessive deficit gives intermediate headline deficit targets of 6.3% of GDP for 2012, 
4.5%  of  GDP  for  2013  and  2.8%  of  GDP  for  2014.  The  underlying  improvement  in  the 
structural budget balance implied by these targets are 2.7% in 2012, 2.5% in 2013 and 1.9% 
in  2014,  in  order  to  bring  the  headline  government  deficit  below  the  3%  of  GDP  reference 
value by 2014. 

EN 

7 

   EN 

 
ANNEX. Comparison of forecasts of 2012 Stability Programme and Commission's 2012 
spring forecast update 

Real GDP
(% change)
Output gap1
(% of potential GDP)
General government balance
(% of GDP)
Primary balance
(% of GDP)
Cyclically-adjusted balance1
(% of GDP)
Structural balance2
(% of GDP)
Government gross debt
(% of GDP)

COM 
SP
COM 
SP
COM 
SP
COM 
SP
COM 
SP
COM 
SP
COM 
SP

2011
0.7
0.7
-4.2
-3.8
-8.9
-8.5
-6.5
-6.1
-6.9
-6.9
-7.0
-7.3
68.5
68.5

2012
-1.9
-1.7
-5.3
-4.3
-6.3
-5.3
-3.1
-2.2
-4.1
-3.4
-4.3
-4.4
80.9
79.8

2013
-0.3
0.2
-4.7
-3.8
-6.1
-3.0
-2.8
0.2
-4.1
-1.4
-4.1
-2.2
86.8
82.3

2014
1.1
1.8
-2.8
-2.1
-6.4
-1.1
-3.1
2.0
-5.1
-0.2
-5.1
-0.2
91.8
81.5

Note: 
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.

Source : Commission services’ 2012 spring forecast update (COM) and April 2012 stability 
programme update (SP)

EN 

8 

   EN