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, autonomous community, budget deficit, gross domestic product, medium-term forecast, programme budgeting, public debt, stability pact, stability programme

EUROPEAN 
COMMISSION 

Brussels, 14.11.2012  
COM(2012) 683 final 

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 

{SWD(2012) 390 final} 

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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 

1. 

EXCESSIVE DEFICIT PROCEDURE: BACKGROUND 

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  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  consistent  with  the  requested 
improvements of the structural budget balance are 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  adopt  the 
announced  multi-annual  budget  plan  for  2013-14  by  the  end  of  July  2012,  including  a 
medium-term budgetary strategy, fully specifying the structural measures, which on the basis 
of the Commission services' update of the 2012 Spring Forecast, 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 

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regarding  transparency  and  control  of  budget  execution.  In  line  with  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. 

2. 

ASSESSMENT OF EFFECTIVE ACTION TAKEN 

This  assessment  is  based  on  the  Commission  services'  2012  Autumn  Forecast.  It  takes  into 
account the economic and budgetary developments since 10 July 2012, when the last Council 
recommendation under Article 126(7) TFEU was issued. 

According  to  the  Commission  services'  2012  Autumn  Forecast,  real  GDP  is  projected  to 
contract by 1.4% in both 2012 and 2013, before growing by 0.8% in 2014. At the time of the 
last Council recommendation under Article 126(7) TFEU, real GDP was expected to contract 
by  1.9%  and  0.3%  in  2012  and  2013,  respectively.  As  the  recovery  was  expected  to  come 
earlier and to be somewhat stronger, real GDP growth was forecast to reach +1.1% in 2014. 
The slightly less negative growth forecast in 2012 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 last Council recommendation under Art.126(7) TFEU. Regarding 2013 and 2014, 
the  Council  recommendation  was  based  on  a  no-policy  change  assumption,  while  the 
Commission  services’  2012  Autumn  Forecast  also  takes  additional  consolidation  measures 
included in the 2013-14 budget plan and the 2013 budget into account. 

In  2012,  according  to  the  Commission  services'  2012  Autumn  Forecast,  the  general 
government deficit is projected to decrease to 8.0% of GDP, or 7.0% of GDP excluding the 
effect of captial injections into banks carried out in 2012, from 9.4% of GDP in 2011 (8.9% of 
GDP  excluding  capital  injections  into  banks  carried  out  in  2011).  This  compares  with  the 
government and revised EDP recommendation target of 6.3% of GDP. Despite the projected 
deviation from the target, the expected decrease in the headline balance would be underpinned 
by a substantial improvement in the primary balance, of around 2½ percentage points (net of 
capital  injections  into  banks  carried  out  in  2012),  against  the  background  of  an  economy 
shrinking  by  close  to  1½  percent.  To  compensate  for  the  likely  deviation  from  the  deficit 
target and in line with the Council recommendation, on 13 July 2012 Spain adopted additional 
consolidation measures of around 1¼% of GDP. Together with earlier consolidation measures 
included in the December 2011 package, the 2012 budget bill and regional rebalancing plans, 
total measures of around 5¼% of GDP were adopted for 2012. However, a considerable part 
of these measures (more than 1½% of GDP) has not been of a permanent nature. Various tax 
increases  were  introduced  only  on  a  temporary  basis  or  consisted  in  bringing  forward  tax 
payments  in  time.  The  elimination  of  the  Christmas  bonus  in  the  public  sector  was  also 
limited  to  2012  only.  This  sizeable  consolidation  effort  would  partly  be  counteracted  by 
strong  revenue  shortfalls  linked  to  a  less  tax-rich  growth  composition  and  a  stronger 
deterioration in the labour market, higher interest payments and higher social transfers, linked 
to the increase in pensions adopted in December 2011. Moreover, as in previous years, there 
are indications that a number of regions would again miss their budgetary targets. 

Netting  out  cyclical  factors  and  one-off  and  other  temproary  measures,  the  Commission 
services'  2012  Autumn  Forecast  foresees  an  improvement  in  the  structural  balance  by  1.2 
percentage points to -6.3% of GDP in 2012, compared with an improvement in the structural 

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balance  of  2.7%  of  GDP  required  in  the  revised  EDP  recommendation.  Correcting  for  the 
downward  revision  of  potential  output  growth  since  the  time  of  the  last  Council 
recommendation under Article 126(7), the estimated structural effort in 2012 would be about 
0.1 percentage points 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  Council 
recommendation.  

For 2013, the Commission services' 2012 Autumn Forecast projects the general government 
deficit to decline to 6% of GDP, compared to a target of 4.5% of GDP indicated by both the 
government  and  in  the  revised  EDP  recommendation.  The  primary  balance  is  expected  to 
improve by 1.8 percentage points, net of bank recapitalisation measures, on the backdrop of 
the economy that is forecast to shrink by 1.4%. Following the last Council recommendation 
under  Articke  126(7)  TFEU,  in  August  2012,  the  Spanish  government  presented  a  multi-
annual  budget  plan  for  2013-14.  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  draft  2013  Budget  bill  presented  in  September  contained  few  new  measures  not 
previously  announced  (e.g. extension of the wealth tax by one year). In total, the budgetary 
impact  of  discretionary  measures  in  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 is partly explained by the worse starting position carried over from the 
previous  year.  However,  the  2013  budget  bill  is  also  based  on  optimistic  macroeconomic 
assumptions,  forecasting  real  GDP  to  contract  by  only  0.5  %  and  employment  to  stabilise. 
This  implies  a  clear  risk  of  revenues  once  again  underperforming  and  social  transfers 
overshooting.  In  addition,  the  draft  budget  law  also  seems  to  underestimate  the  increase  in 
social  benefits,  including  pensions  and  unemployment  benefits.  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. 

According  to  the  Commission  services'  2012  Autumn  Forecast,  the  structural  deficit  is 
projected  to  further  narrow  by  2.3  percentage  points  and  to  reach  4.0%  of  GDP  in  2013, 
broadly  in  line  with  the  last  Council  recommendation  under  Article  126(7)  TFEU  which 
requires  a  structural  improvement  of  2.5%  of  GDP.  Correcting  for  the  change  in  estimated 
potential  output  growth  between 
revised  EDP 
recommendations and the Commission services' 2012 Autumn Forecast, the structural effort 
would be around 0.1-0.2 percentage points higher.  

the  projections  underlying 

the 

For  2014,  the  Commission  services'  2012  Autumn  Forecast  foresees  an  improvement  in  the 
economic  outlook  with  real  GDP  growth  returning  to  positive  territory.  This  would  not  be 
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. Apart from the base effect, the expected 
deviation mainly reflects the expiry of temporary measures taken in previous years, the fact 
that  planned  consolidation  measures  for  2014  were  not  sufficiently  specified  in  the  multi-
annual  budget  plan  announced  in  August  and  therefore  could  not  be  included  in  the 
Commission services' forecast, and that the composition of economic growth would continue 
to  be  tax-poor,  with  tax  revenues  not  rising  in  full  proportion  to  nominal  GDP.  Interest 
payments would also keep rising due to a higher debt stock. 

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The structural deficit is projected to deteriorate by 1.3 percentage points in 2014, compared to 
a  recommended  improvement  of  1.9%  of  GDP.  Correcting  for  the  change  in  estimated 
potential growth between the projections underlying the last Council recommendation under 
Article  126(7)  TFEU  and  the  Commission  services'  2012  Autumn  Forecast,  the  estimated 
structural  effort  in  2014  would  be  around  0.1-0.2  percentage  points  higher.  This  leaves  the 
structural  effort  about  3  percentage  points  short  of  the  level  required  by  the  Council 
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, given that so far little or very few measures for 2014 have been specified, a 
complete assessment of effective action for 2014 at this stage is not possible.  

In the Council recommendation under Article 126(7) of July 2012, Spain was also asked to 
strictly  apply  the  new  provisions  of  the  Budgetary  Stability  Law  (BSL)  regarding 
transparency and control of budget execution and to establish an independent fiscal institution 
to provide analysis, advice, and monitor fiscal policy as well as to monitor adherence to the 
budgetary targets for all levels of the general government. Regarding the BSL, improvements 
have  been  made,  in  particular,  on  reporting  of  fiscal  data  for  regional  governments,  which 
represent  a  step  forward  in  achieving  higher  fiscal  transparency.  However,  given  the 
challenge  of  introducing  new  reporting  procedures  across  regional  administrations,  a  sound 
track  record  regarding  the  quality  and  consistency  of  reporting  remains  to  be  achieved. 
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.  As  regards  the  establishment  of  an  independent  fiscal 
institution,  on  27  September  the  Spanish  government  took  a  decision  to  establish  such  an 
institution. Its remit and governing structure is currently being defined. The institution is to be 
created in 2013, once the relevant organic law has been adopted. 

3. 

CONCLUSIONS 

On  current  information,  it  appears  that  Spain  has  taken  effective  action  that  represents 
adequate progress towards correcting the excessive deficit in 2012 and 2013 within the limits 
specified  by  the  Council  on  10  July  2012.  In  particular,  Spain  has  adopted  sizeable 
consolidation measures  amounting to around 5¼% of GDP  in 2012  and  to  2¼%  of GDP in 
2013. Correcting for revisions in potential output growth and for revenue shortfalls due to tax-
poor  growth,  the  estimated  annual  improvement  of  the  structural  balance  is  in  line  with  the 
effort  required  by  the  Council  for  2012  and  2013.  However,  in  2012  the  provisions  of  the 
Budget Stability Law with respect to the envisaged early warning and corrective mechanisms 
to  limit  deviations  from  the  budgetary  targets  of  the  Autonomous  Communities  were  not 
effectively implemented. This could lead to renewed budgetary slippages at the regional level. 
For  2013,  there  are  clear  risks  to  achieving  the  nominal  targets  stemming  partly  from  an 
optimistic  macroeconomic  scenario  underlying  the  2013  Budget  bill  and  optimistic 
projections for social security.  

As  regards  2014,  it  appears  that  Spain  has  not  taken  sufficient  measures  yet  to  deliver  the 
required structural effort. The multi-annual budget plan announced in August did not present 
sufficiently specified measures to underpin the recommended fiscal effort. Therefore, there is 
still a need to specify additional, permanent measures for 2014. 

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In view of the above assessment, while effective action has been taken for 2012 and 2013, the 
measures  for  2014  fall  short  of  the  revised  EDP  recommendation.  Based  on  this  knife-edge 
assessment, the Commission considers that no further steps in the excessive deficit procedure 
of Spain are needed at present. The Commission will continue to closely monitor budgetary 
developments in Spain in accordance with the Stability and Growth Pact. 

Furthermore,  as  regards  fiscal  governance,  despite  progress  being  made  with  respect  to 
budgetary reporting at regional level, achieving a higher degree of fiscal transparency would 
require  more  comprehensive,  consistent  and  timely  reporting  on  a  consolidated  general 
government  basis  in  line  with  ESA95.  Finally,  it  would  be  important  to  proceed  with  the 
establishment of the fiscal council as planned and to ensure its full institutional and financial 
independence. 

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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