COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Spain in response to the Council Recommendation of 10 July 2012 with a view to bringing an end to the situation of excessive government deficit
Date: 2012-11-14
Institutions: European Commission
Subjects: Spain, budget deficit, budgetary stabiliser, gross domestic product, public debt

EUROPEAN 
COMMISSION 

Brussels, 14.11.2012  
SWD(2012) 390 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the action taken 

by Spain 

in response to the Council Recommendation of 10 July 2012 with a view to bringing an 
end to the situation of excessive government deficit 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of action taken by Spain in response to the Council Recommendation of 10 
July 2012 with a view to bringing an end to the situation of excessive government deficit

{COM(2012) 683 final} 

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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 adopted 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.  

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. 

On 10 July 2012, the Council decided, in accordance with Article 3(5) of Council Regulation 
(EC) No 1467/97, that effective action had been taken but that unexpected adverse economic 
events with major unfavourable consequences for government finances had occurred after the 
adoption  of  the  revised  recommendation  in  2009.  The  Council  therefore  adopted  a  revised 
recommendation  under  Article  126(7)  TFEU  ("the  revised  EDP  recommendation")  and 
recommended Spain to correct the excessive deficit by 2014 at the latest. In order to bring the 
headline  government  deficit  below  the  3%  of  GDP  reference  value  by  2014,  Spain  was 
recommended to 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, 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  were  also  recommended  to  implement  the  measures  adopted  in  the 
2012  budget  and  in  the  Autonomous  Communities’  rebalancing  plans  and  to  adopt  the 
announced  multi-annual  budget  plan  for  2013-14  by  the  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.  They  were  also 
recommended  to  adopt  without  delay  additional  measures  in  2012  should  risks  to  the 
budgetary plans materialise. In addition, Spain was asked to strictly apply the new provisions 
of the Budgetary Stability Law regarding transparency and control of budget execution and 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. 

2. 

ECONOMIC DEVELOPMENTS 

After briefly returning to positive economic growth in 2011 thanks to strong net exports, the 
Spanish  economy  has  fallen  back  into  recession,  recording  negative  real  GDP  growth  since 

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the third quarter of 2011. According to the Commission services' 2012 Autumn Forecast, the 
recession is expected to deepen in the second half of 2012, with the economy only returning 
to positive growth towards the end of 2013. This is expected to result in real GDP contracting 
by  1.4%  in  both  2012  and  2013,  before  growing  by  0.8%  in  2014.  The  simultaneous 
deleveraging of the private and public sector, the very high unemployment rate and financial 
uncertainties are weighing down on domestic demand. The continuing positive contribution to 
GDP  growth  from  net  exports  is  not  expected  to  offset  the  deep  contraction  of  domestic 
demand until 2014.  

At the time of the revised EDP recommendation, real GDP was expected to contract sharply 
in 2012 before bouncing back in the first half of 2013, yielding annual growth rates of -1.9% 
and -0.3% in 2012 and 2013, respectively. As the recovery was expected to come earlier and 
to  be  stronger,  annual  real  GDP  in  2014  was  forecast  to  reach  1.1%.  Real  GDP  growth  in 
2012  is  expected  to  turn  out  slightly  less  negative  than  in  July.  This  is  mainly  due  to 
somewhat  more  resilient  domestic  demand  as  fiscal  consolidation  has  had  a  more  gradual 
impact  than  expected  at  the  time  of  the  revised  EDP  recommendation.  Regarding  2013  and 
2014, the revised EDP recommendation was based on a no-policy change assumption, while 
the Commission services’ 2012 Autumn Forecast also took additional consolidation measures 
included in the 2013-14 budget plan and the 2013 budget into account. The more protracted 
recession  assumed  in  the  Commission  services'  2012  Autumn  Forecast  for  2013  and  2014 
implies a more pronounced deterioration in the productive capacity of the Spanish economy, 
as  evidenced  by  the  downward  revision  of  potential  output  growth  by  0.2,  0.4  and  0.4 
percentage points in the three respective years in the 2012-14 period.  

Table 1: Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Contributions to real GDP growth:
          Final domestic demand
          Changes in inventories
          Net exports
Employment (% change)
GDP deflator (% change)
Output gap (% of potential GDP)
Potential output growth (% change)

2011
outturn
0,4

-1,9
-0,1
2,3
-1,5
1,0
-4,2
-0,2

2013
COM SF12 COM AF12 COM SF12 COM AF12 COM SF12 COM AF12

2012

2014

-1,9

-4,4
0,0
2,5
-4,0
0,9
-5,3
-0,8

-1,4

-4,0
0,0
2,6
-4,4
0,2
-4,6
-1,0

-0,3

-2,0
0,0
1,6
-1,5
0,6
-4,7
-0,9

-1,4

-3,8
0,0
2,3
-2,6
1,9
-4,8
-1,3

1,1

-0,1
0,0
1,2
0,3
1,4
-2,8
-0,9

0,8

-0,3
0,0
1,2
0,2
1,4
-2,7
-1,3

Source : COM SF12 - Commission services' updated 2012 spring forecast; COM AF12 - Commission services' 2012 autumn forecast.

3. 

BUDGETARY IMPLEMENTATION AND OUTLOOK IN 2012 

The  general  government  deficit  reached  9.4%  of  GDP  in  2011,  only  slightly  lower  than  the 
9.7% recorded in 2010. However, the 2011 deficit includes the effect of capital injections into 
banks  carried  out  during  the  year  of  around  EUR  4.5bn  (slightly  above  0.4%  of  GDP). 
Regarding the evolution of public finances in 2012, the general government deficit in the first 
half of the year reached 4.3% of annual GDP, compared with 4.1% for the same period in the 
previous year.  Adjusting the figure for capital injections into banks carried out in 2012, the 
deficit  in  the  first  half  of  2012  was  3.8%  of  GDP.  The  deficit  reduction  in  the  first  half  of 
2012 was therefore limited, as shortfalls especially in indirect tax revenues and higher interest 
and social expenditures offset reductions in government consumption and public investment.  

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However, as a number of consolidation measures are expected to take effect in the last four 
months  of  the  year,  the  Commission  services'  2012  Autumn  Forecast  foresees  the  general 
government  deficit  to  decrease  to  8.0%  of  GDP  by  the  end  of  the  year,  or  7.0%  of  GDP 
excluding the effect of additional capital injections into banks in 20121. The headline deficit 
(net of capital injections into banks) would therefore decrease by close to 2 percentage points. 
The primary balance is expected to narrow from -7% of GDP in 2011 to -5% in 2012; net of 
capital  injections  into  banks,  the  improvement  in  the  primary  balance  would  be  around  2.5 
percentage points against the background of an economy shrinking by close to 1½%. 

The government and EDP target for the headline deficit in 2012 is 6.3% of GDP. Apart from 
the  recapitalisation  measures,  the  projected  deviation  is  mainly  linked  to  weaker-than-
expected  revenues,  higher  social  benefits  and  some  expenditure  overruns.  The  less  tax-rich 
growth composition and a stronger deterioration in the labour market implied major revenue 
shortfalls, notably of indirect taxes, and higher social expenditure. These shortfalls were not 
fully  compensated  by  discretionary  measures.  As  a  result,  despite  an  increase  in  VAT  and 
personal and corporate income tax, revenue from these taxes remained weaker than expected 
at  the  time  of  the  revised  EDP  recommendation.  Social  contributions,  on  the  contrary,  are 
expected to increase its share of GDP due to discretionary measures (specifically, reduction of 
bonuses,  which  have  been  accounted  as  an  increase  in  revenues)  and  a  base  effect  due  to 
revisions  for  2011.  On  the  expenditure  side,  slippages  of  around  0.5  pp.  are  expected  for 
social payments and intermediate consumption. However, if base effects, due to the revisions 
for year 2011, are discounted, these slippages would be limited to 0.3 for social payments and 
zero for intermediate consumption.  

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The financial sector assistance programme for bank recapitalization put in place on 23 July 2012 has not 
yet had any impact on the general government debt and deficit forecast for 2012-14. 

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Table 2: Composition of the budgetary adjustment 

2011

outturn

SP April 
2012

SP April 
2012

% of 
GDP
35,7

9,9
9,6
13,2
3,1
45,2

% of 
GDP
35,1

9,8
9,5
13,0
2,9
43,6

42,7

41,2

11,6
5,9
18,2
1,1
2,9
3,0
2,5

-9,4
-7,0
-0,2
-7,5
-

0,4
1,0
1,4

11,5
5,4
18,0
1,1
2,8
2,5
2,4

-8,5
-6,1
0,4
-7,3
-

0,7
1,4
2,1

% of 
GDP
36,3

9,8
10,3
13,2
3,0
41,6

38,4

10,9
4,5
18,6
0,9
1,7
1,9
3,2

-5,3
-2,2
1,0
-4,4
3,1

-1,8
1,0
-0,8

2012
COM   
SF 2012

% of 
GDP
35,9

2013

2014

COM 
AF 2012 

COM   
SF 2012

COM AF 
2012     

COM   
SF 2012

COM AF 
2012     

% of 
GDP
36,3

% of 
GDP
35,7

% of 
GDP
36,7

% of 
GDP
34,7

% of 
GDP
35,8

9,9
10,2
12,8
3,0
42,2

9,6
10,2
13,2
3,3
44,3

9,8
10,1
12,6
3,2
41,8

10,2
10,2
13,1
3,2
42,7

9,8
9,6
12,3
3,0
41,1

10,1
9,7
12,9
3,2
42,3

39,0

41,3

38,5

38,9

37,8

38,3

10,9
4,9
18,5
0,9
1,9
1,9
3,2

-6,3
-3,1
0,2
-4,3
3,2

-1,9
0,9
-1,0

11,0
5,4
19,0
1,0
1,8
2,9
3,0

-8,0
-5,0
0,3
-6,3
1,2

1,2
-1,4
0,2
-1,2

10,7
4,6
18,6
0,9
1,8
1,9
3,3

-6,1
-2,8
0,0
-4,1
0,2

-0,3
0,6
0,3

11,0
4,8
18,7
1,0
1,5
1,9
3,9

-6,0
-2,2
0,1
-4,0
2,3

2,4
-1,4
1,9
0,4

10,2
4,6
18,4
0,9
1,8
1,9
3,3

-6,4
-3,1
0,0
-5,1
-1,0

1,1
1,4
2,5

10,6
4,8
18,6
1,0
1,5
1,9
4,0

-6,4
-2,5
0,0
-5,3
-1,2

-1,1
0,8
1,4
2,3

Revenue
of which:
- Taxes on production and imports
- Current taxes on imcome, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure
      of which:
     - Compensation of employees
     - Intermediate consumption
     - Social payments
     - Subsidies
     - Gross fixed capital formation
     - Other (resedual)
- Interest expenditure

General government balance (GGB)
Primary balance
One-off and other temporary measures
Structural balance
Change in structural balance

Corrected change in structural balance 
due to revision of potential output growth
Real GDP growth
GDP deflator
Nominal GDP

Source:  SP April 2012 - Stability Programme April 2012; COM SF 2012 - Commission services' updated 2012 spring forecast; COM AF 
2012 - Commission services' 2012 autumn forecast.

The revised EDP recommendation of 10 July 2012 requires Spain to achieve an improvement 
in the structural balance of 2.7% in 2012. The Commission services' 2012 Autumn Forecast 
points to an expected improvement in the structural deficit of only 1.2 percentage points, with 
an  expected  structural  deficit  of  6.3%  of  GDP  in  2012.  However,  large  negative  potential 
output growth estimates for 2012-14 complicate the interpretation of these structural balances. 
Due to the negative potential output growth, the economic contraction in 2012 does not fully 
translate  into  an  increase  in  the  cyclical  deficit  component.  Put  differently,  the  budgetary 
deterioration caused in 2012 by the economic contraction is to a large extent captured in the 
structural  balance  and  therefore  offsets  to  some  extent  the  improvements  linked  with 
consolidation measures. Moreover, accounting for the downward revision of potential output 
since  the  time  of  the  revised  EDP  recommendation  would  imply  that  the  estimated  fiscal 
effort  in  2012  would  be  about  0.1  percentage  point  higher.  Moreover,  the  change  in  the 
structural  balance  was  also  severely  affected  by  revenue  shortfalls  (i.e.  relative  to  GDP 
developments  using  standard  revenue  elasticities)  which  amount  to  around  1½  percentage 
points of GDP. Overall, taking these revenue shortfalls into account, the estimated structural 
effort would further increase to around 2¾ percentage points – in line with the effort required 
under the revised EDP recommendation.  

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The budgetary improvement of around 2.5% of GDP of the primary balance in 2012 (net of 
capital injections into banks) was achieved despite a sharp contraction in the economy and a 
very  tax-weak  growth  composition.  To  compensate  for  likely  deviations  from  the  deficit 
target, Spain adopted several discretionary consolidation packages during 2012. In December 
2011, a first package of measures was presented, including a temporary hike in tax rates on 
personal  income  and  permanent  cuts  in  ministerial  spending  levels.  This  was  followed  by 
further  measures  contained  in  the  2012  budget  law  presented  in  April  and  the  Autonomous 
Communities'  rebalancing  plans  in  May,  imposing  mainly  further  expenditure  cuts,  notably 
within  the  areas  of  health  and  education.  In  view  of  the  budgetary  development  in  the  first 
half  of  the  year  and  in  line  with  the  revised  EDP  recommendation,  on  13  July,  the  Spanish 
authorities adopted  additional  consolidation measures of around 1¼% of GDP to ensure the 
fulfilment of the budgetary plan for 2012. These measures affect the second half of 2012 and 
2013  and  include  a  permanent  hike  in  VAT  rates  and  the  temporary  elimination  of  the 
Christmas  bonus  for  public  employees  limited  to  2012.  On  the  whole,  total  measures  of 
around 5¼% of GDP were adopted for 2012, including 1¾% of GDP on the revenue side and 
3½% of GDP on the expenditure side2. However, a considerable part of these measures (more 
than  1½%  of  GDP)  has  not  been  of  a  permanent  nature.  A  number  of  measures,  including 
some introduced  before  2012,  are  set to expire during 2012 or are of a one-off nature. This 
concerns  in  particular  the  elimination  of  the  Christmas  bonus  in  the  public  sector  (0.4%  of 
GDP) and the change in the tax instalment system for corporate taxes (0.2% of GDP). These 
do  not  contribute  durably  to  fiscal  consolidation.  Nevertheless,  a  bottom-up  analysis  of  the 
amount of durable discretionary fiscal consolidation measures implemented by Spain in 2012 
with a view to correct the excessive deficit and to achieve the intermediary target this year, 
yields a total effort of around 3½-4% of GDP. Since an important part of these measures is 
due to materialise only in the last four months of the year, there are still some implementation 
risks attached to these numbers. Some of the measures announced in the regional adjustment 
plans for 2012 were not taken into account in the Commission services' Autumn Forecast for 
either being unspecified or highly uncertain, notably planned sales of real estate, which has a 
track  record  of  being  significantly  overestimated.  Moreover,  as  in  previous  years,  there  are 
indications  that  a  number  of  regions  will  again  miss  their  budgetary  targets  of  limiting  the 
deficit to 1.5% of GDP. Although the aggregate deficit of all autonomous regions amounted 
to  0.77%  of  GDP  in  the  first  half  of  2012,  seven  regions  had  deficits  of  more  than  1%  of 
GDP.  Moreover,  after  adjusting  for  the  frontloading  of  central  government  transfers  to  the 
regions, the aggregate deficit was above 0.9% of annual GDP in the first half of 2012.  

2 

This  is  a  Commission  estimate,  which  does  not  take  into  account  the  expected  impact  of  the  fiscal 
amnesty, announced measures to fight tax fraud, and certain revenue raising measures linked to planned 
privatisations. 

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Table 3: Main discretionary measures in 2012 

(% of GDP) 

Revenues 

Expenditure 

Cuts in public investment 

Cuts in health and education 

Elimination of Christmas bonus 
for public employees 

Local administration reform 

Changes to corporate taxation 

Personal income tax hike 

VAT hike 

0.6 

0.35 

0.2 

0.7 

0.4 

0.4 

0.3 

N.B. Negative sign denotes deficit-increasing measure 

4. 

BUDGETARY IMPLEMENTATION AND OUTLOOK IN 2013 

According to the Commission services' 2012 Autumn Forecast and with real GDP expected to 
shrink again by 1.4% on the previous year, the government deficit is projected to decline to 
6.0%  of  GDP  in  2013,  compared  to  the  EDP  and  government  target  of  4.5%  of  GDP.  The 
primary balance is expected to improve by 2.8 percentage points (1.8 percentage points net of 
capital injections into banks) to reach -2.2% of GDP in 2013. Despite 2013 being another year 
of  contracting  domestic  demand,  hikes  in  indirect  taxes  such  as  VAT  and  excise  duties  are 
expected  to  result  in  total  revenues  rising  by  slightly  above  2%.  On  the  expenditure  side, 
sizeable cuts in intermediate consumption and social transfers other than in kind, are set to be 
more or less offset by an expected rise in interest expenditure due to a higher debt stock and 
higher interest rates. There are, however, risks to this scenario, notably on the revenue side if 
similar shortfalls as in 2012 were to materialise. 

The revised EDP recommendation of 10 July 2012 requires Spain to achieve a structural fiscal 
consolidation  of  2.5%  of  GDP  in  2013.  The  Commission  services'  2012  Autumn  Forecast 
projects the structural deficit to further narrow by 2.3% percentage points and to reach 4.0% 
of  GDP  in  2013,  broadly  in  line  with  the  revised  EDP  recommendation.  Correcting  for  the 
change in the estimated potential growth between the projections underlying the revised EDP 
recommendations  and  the  Autumn  forecast,  the  estimated  fiscal  effort  in  2013  would  be 
around 0.1-0.2 percentage points higher. 

Following  the  revised  EDP  recommendation,  in  August  2012,  the  Spanish  government 
presented  a  multi-annual  budget  plan  for  2013-14,  outlining  the  main  features  of  the 
consolidation  strategy  for  the  medium-term.  However,  for  2013,  the  plan  did  not  specify 
many new revenue measures compared to what had already been announced in the July 2012 
package.  The  latter  foresees  the  VAT  hike  to  have  its  main  impact  in  2013.  On  the 
expenditure side, a large share of the consolidation effort stems from measures at the regional 
level (0.6% of GDP) and from changes to unemployment benefits (0.3% of GDP). Finally, the 
draft  2013  Budget  bill  presented  in  September  contained  few  new  measures  not  previously 

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announced,  such  as  an  extension  of  the  wealth  tax  by  one  year.  Partly  offsetting  these 
consolidation  measures,  there  are  a  number  of  one-off  measures  introduced  in  2012  that 
expire  in  2013,  notably  in  the  corporate  income  taxation  area  and  with  regard  to  the 
reintroduction of Christmas bonus for public employees. In addition, pension expenditure is 
expected to rise in 2013, as the number of pensioners rise and the average pension increases 
due  to  both  composition  effects  and  a  1%  hike  in  pension  levels.  In  total,  the  impact  of 
discretionary measures on 2013 is expected to be about 1¼% of GDP on the expenditure side 
and about 1% of GDP on the revenue side. 

The expected budget deviation of 1½% of GDP in 2013 from the target is partly explained by 
the worse starting position (base effect, ¾% of GDP). However, the 2013 budget bill is also 
based  on  optimistic  macroeconomic  assumptions.  The  draft  2013  budget  law  forecasts  real 
GDP  to  contract  by  only  0.5  percentage  points  and  employment  to  stabilise.  This  implies  a 
clear  risk  of  revenues  once  again  underperforming  and  social  transfers  overshooting.  This 
could explain about ½ percentage point of the deviation from the target. In addition, the draft 
budget law also seems to underestimate the increase in social benefits, including pensions and 
unemployment  benefits,  which  could  explain  a  further  ¼  percentage  point.  For  the  regions, 
the main consolidation measures in 2013 are the cuts in health and education included in the 
2013-14  Budget  Plan.  There  is,  however,  no  information  currently  available  on  the  actual 
implementation in regional budgets of these planned measures.  

Table 4: Main discretionary measures in 2013 

(% of GDP) 

Revenues 

Expenditure 

Cuts in health and education 

Cuts in unemployment benefits 

Freezing of public sector hiring 

Elimination of Christmas bonus 
for public employees 

VAT hike 

Personal income tax hike 

Changes to corporate taxation 

0.7 

0.15 

-0.25 

0.6 

0.35 

0.15 

-0.4 

N.B. Negative sign denotes deficit-increasing measure 

5. 

BUDGETARY IMPLEMENTATION AND OUTLOOK IN 2014 

For  2014,  the  Commission  services'  2012  Autumn  Forecast  foresees  real  GDP  growth  of 
0.8%. The expected return to positive economic growth and some positive, albeit limited, net 
job creation is, however, not sufficient to achieve a further narrowing of the headline deficit, 
which is expected to widen to 6.4% of GDP compared to a target of 2.8% of GDP. The few 
additional consolidation measures specified are not enough to offset the expiry of temporary 
measures taken in previous years. The primary deficit is expected to widen by 0.3% of GDP 
to  2.5%  in  2014.  Apart  from  the  base  effect  (1½%  of  GDP),  the  expected  deviation  mainly 

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reflects the expiry of temporary measures and the fact that the planned consolidation measures 
for 2014 were not sufficiently specified in the multi-annual budget plan announced in August. 
Moreover,  the  composition  of  economic  growth  continues  to  be  tax-poor,  with  social 
contributions  and  indirect  taxes  not  rising  in  full  proportion  to  nominal  GDP.  Interest 
payments also keep rising due to a higher debt stock. 

The revised EDP recommendation of 10 July 2012 requires Spain to achieve a structural fiscal 
consolidation  of  1.9%  of  GDP  in  2014.  In  contrast,  according  to  the  Commission  services' 
2012  Autumn  Forecast  the  structural  deficit  is  projected  to  deteriorate  by  1.3  percentage 
points to 5.3% in 2014. Correcting for the change in the estimated potential growth between 
the projections underlying the revised EDP recommendations and the 2012 Autumn forecast, 
the  estimated  fiscal  effort  in  2014  would  be  about  0.1-0.2  percentage  points  higher.  This 
leaves the structural effort about 3 percentage points short of the level required by the revised 
EDP recommendation. Adjusting for unexpected revenue shortfalls would probably decrease 
this gap further, as some revenues are not following the growth path implied by nominal GDP 
growth. However, this would not be enough to achieve the required structural effort. 

The  main  discretionary  consolidation  measures  with  an  incremental  impact  in  2014  are  the 
freeze  in  public  sector  hiring  (0.15%  of  GDP),  various  measures  restricting  early  or  partial 
retirement  (0.1%  of  GDP)  and  a  review  of  some  exemptions  and  reductions  in  the  personal 
income tax (0.1% of GDP). The main discretionary measures that are expiring in 2014 are the 
2012 hikes to personal income tax rates (0.5% of GDP), the temporary wealth tax (0.1% of 
GDP)  and  the  hike  from  15%  to  21%  of  withholdings  in  the  personal  income  tax  system 
(0.1% of GDP). The 2013-14 Budget Plan included further consolidation measures at regional 
and  local  level  of  about  ¾%  of  GDP  in  the  field  of  health  and  education  and  regarding 
regional  and  local  administration  consolidation.  However,  these  were  not  sufficiently 
specified in order to be included in the Commission services' Autumn Forecast. 

Table 5: Main discretionary measures in 2014 

(% of GDP) 

Revenues 

Expenditure 

Freezing of public sector hiring 

0.15 

Expiry of personal income tax hike 

-0.5 

N.B. Negative sign denotes deficit-increasing measure 

6. 

BUDGETARY FRAMEWORK 

In  the  revised  EDP  recommendation  of  July  2012,  Spain  was  also  required  to  strictly  apply 
the  new  provisions  of  the  Budgetary  Stability  Law  regarding  transparency  and  control  of 
budget execution. Progress has been made recently regarding the reporting of fiscal data for 
regional governments. Spain has started to publish quarterly fiscal accounts for subsectors in 
national accounts terms, including detailed information on the regions' revenues, expenditures 
and  fiscal  balances.  Consolidated  quarterly  accounts  for  the  general  government  in  national 
accounts terms are now published with a lag of only two months. Moreover, since October, 
monthly reports on regional public finances are published on a budget execution basis with a 
month  and  a  half  delay.  As  from  2013,  monthly  regional  fiscal  data  are  to  be  published  in 
national accounts terms. Some improvements in the municipalities' fiscal reporting have also 
been made with a delay in reporting of maximum three months. Despite these improvements 

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which  are  a  step  forward  in  achieving  higher  fiscal  transparency,  a  sound  track  record 
regarding the quality and consistency of reporting remains to be achieved, given the challenge 
of introducing new reporting procedures across regional administrations. Also, the data may 
not be very informative given that no long time series are planned to be reported. This may 
impede  the  correct  interpretation  of  the  budgetary  developments.  Critically,  implementation 
of the preventive and corrective arm of the Budget Stability Law appears to be insufficient. 
No  official  early  warning  mechanism  or  corrective  action  has  been  triggered  so  far,  even 
though several Autonomous Communities are clearly at risk of not meeting their fiscal targets 
in 2012.  

By  the  end  October  2012,  eight  of  the  17  Autonomous  Communities  have  applied  for 
financial aid from the Regional Liquidity Fund (RLF) set up to provide affordable financing 
to  regions  that  experience  funding  difficulties.  The  amount  requested  has  reached  around 
EUR  17bn  out  of  total  of  EUR  18bn.  The  provision  of  liquidity  is  subject  to  strengthened 
fiscal  conditionality  and  supervision  through  continuous  monitoring  of  the  adjustment  plans 
of each beneficiary region in order to ensure meeting the general government budget deficit 
target. The government has recently announced that the RLF will be extended through 2013. 
However, the funding mechanism will be changed. Contrary to 2012 when part of the funding 
is provided by banks, in 2013 the funding needs of the regions will be covered entirely by the 
central  government.  This  would  make  the  process  more  transparent,  efficient,  and  cheaper, 
given the lower spreads on the sovereign debt. 

In line with the country-specific recommendations under the European Semester, the Council 
also asked 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. On 27 September, the Spanish government decided to 
establish such an independent institution.3 Its remit and governing structure is currently being 
defined.  The  Spanish  authorities  have  committed  to  follow  common  principles  regarding 
these aspects. The institution is to be created in 2013, once the relevant organic law has been 
adopted.  

3 

This will also be required under the Treaty on stability, coordination and governance in the Economic 
and Monetary Union. 

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Table 6: Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Output gap1 
(% of potential GDP) 

General government 
balance3 
(% of GDP) 

Primary balance 
(% of GDP) 

Cyclically-adjusted 
balance1 
(% of GDP) 

Structural balance2 
(% of GDP) 

Government gross debt3 
(% of GDP) 

Notes:  

COM AF 12 
COM SF 12 
SP 
COM AF 12 
COM SF 12 
SP 
COM AF 12 
COM SF 12 
SP 
COM AF 12  
COM SF 12 
SP 
COM AF 12  
COM SF 12 
SP 
COM AF 12  
COM SF 12 
SP 
COM AF 12  
COM SF 12 
SP 

2009 
-3.7 
-3.7 
-3.7 
-4.2 
-4.3 
- 
-11.2 
-11.2 
- 
-7.7 
-9.4 
- 
-9.4 
-9.3 
- 
-8.7 
-8.7 
- 
53.9 
53.9 
- 

2010 
-0.3 
-0.1 
-0.1 
-4.8 
-4.8 
- 
-9.7 
-9.3 
- 
-7.0 
-7.4 
- 
-7.6 
-7.3 
- 
-7.6 
-7.3 
- 
-61.5 
-61.2 
- 

2011 
0.4 
0.7 
0.7 
-4.2 
-4.2 
-3.8 
-9.4 
-8.9 
-8.5 
-5.0 
-6.5 
-6.1 
-7.6 
-6.9 
-6.9 
-7.5 
-7.0 
-7.3 
69.3 
68.5 
68.5 

2012 
-1.4 
-1.9 
-1.7 
-4.6 
-5.3 
-4.3 
-8.0 
-6.3 
-5.3 
-2.2 
-3.1 
-2.2 
-6.0 
-4.1 
-3.4 
-6.3 
-4.3 
-4.4 
86.1 
80.9 
79.8 

2013 
-1.4 
-0.3 
0.2 
-4.8 
-4.7 
-3.8 
-6.0 
-6.1 
-3.0 
-2.5 
-2.8 
0.2 
-4.0 
-4.1 
-1.4 
-4.0 
-4.1 
-2.2 
92.7 
86.8 
82.3 

2014 
0.8 
1.1 
1.8 
-2.7 
-2.8 
-2.1 
-6.4 
-6.4 
-1.1 
-2.1 
-3.1 
2.0 
-5.3 
-5.1 
-0.2 
-5.3 
-5.1 
-0.2 
97.1 
91.8 
81.5 

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. 

3 The financial sector assistance programme for bank recapitalization put in place on 23 July 2012 has 
not yet had any impact on the general government debt and deficit forecast for 2012-14.  

Source: COM AF12- Commission services' 2012 autumn forecast; COM SF12 - Commission services' 
updated 2012 spring forecast; SP – Stability Programme April 2012 

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