Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Spain
Date: 2013-05-29
Institutions: European Commission
Subjects: Spain, budget deficit, budgetary equilibrium, social security legislation, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 383 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

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

{SWD(2013) 383 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  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  Treaty  on  the  Functioning  of  the  European  Union 
(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 1. 

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.2 Notably, the sharp 
deterioration in the growth outlook in the wake of the global economic and financial 
crisis had major negative budgetary implications. As a result, the Council decided to 
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.  

1 
2 

OJ L 209, 2.8.1997, p. 6. 
All documents related to the excessive deficit procedure for Spain can be found at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/spain_en.htm  

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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.  

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. 
Notably,  a  worsening  in  the  growth  outlook  and  the  shift  to  a  less  tax-rich  growth 
composition  had  major  negative  budgetary  implications.  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 were set at 6.3% of GDP for 2012, 4.5% of GDP for 2013 and 
2.8%  of  GDP  in  2014.  Spain  was  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  would  fully  specify  the 
structural  measures  necessary  to  achieve  the  correction  of  the  excessive  deficit  by 
2014.  

On  14  November  2012,  the  Commission  concluded,  based  on  the  Commission 
services' 2012 Autumn Forecast, that Spain had taken effective action in compliance 
with the revised Council recommendation of 10 July 2012 and that no further steps in 
the excessive deficit procedure were required. 

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.  

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(10)  After  a  short-lived  recovery  in  2011  the  economy  has  slipped  back  into  recession, 
recording  negative  quarterly  real  GDP  growth  since  the  third  quarter  of  2011.  In 
annual terms, GDP fell by 1.4% in 2012. According to the Commission services' 2013 
Spring Forecast, the recession is set to continue in 2013, with positive net exports still 
not able to offset the on-going contraction of domestic demand. Output is expected to 
stabilise only towards the end of 2013. Real GDP is thus projected to contract by 1.5% 
in 2013, before growing by 0.9% in 2014 (under a no-policy-change assumption). At 
the  time  of  the  last  Council  recommendation,  real  GDP  was  expected  to  contract  by 
1.9% and 0.3% in 2012 and 2013, respectively, and to grow by 1.1% in 2014. The less 
negative  growth  outcome  in  2012  was  mainly  due  to  somewhat  more  resilient 
domestic  demand  possibly  also  thanks  to  the  liquidity  injected  via  the  repayment 
scheme  for  the  commercial  debt  accumulated  by  the  regions  and  local  authorities 
before 1 January 2012 (EUR 27.4 bn, or 2.6% of GDP). Regarding 2013 and 2014, the 
Commission  services'  2013  Spring  Forecast  envisages  a  sharper  contraction  of  real 
GDP in 2013 and a more subdued recovery in 2014. This includes a sharper drop in 
domestic  demand  in  both  years  and  a  more  protracted  slump  in  employment.  The 
deterioration in the macroeconomic outlook is partly linked to additional consolidation 
measures included  in the  2013-14  budget plan and the 2013  budget  being  taken into 
account. 

(11)  According to the Commission services' 2013 Spring Forecast, the general government 
deficit reached 10.6% of GDP in 2012, compared with a government and EDP target 
of 6.3% of GDP and a 9.4% of GDP outcome in 2011. Adjusting for capital transfers 
to banks (which are considered as one-off operations), the corresponding deficits were 
7.0% and 9.0% of GDP in 2012 and 2011, respectively. The decrease in the headline 
balance  corresponds  to  an  improvement  in  the  primary  balance  of  2.4  pps.  (net  of 
capital transfers into banks), against the background of a shrinking economy and a tax-
weak growth composition. The Commission services' 2013 Spring Forecast points to 
an  improvement  in  the  structural  deficit  of  1.8  pps.  in  2012,  compared  with  a 
recommended improvement of 2.7 pps. Correcting for the slight downward revision of 
potential  output  since  the  last  Council  recommendation,  the  estimated  fiscal  effort 
remains  unchanged.  However,  the  estimated  change  in  the  structural  balance  was 
severely affected by unexpected revenue shortfalls, which amounted to around 1.0 pp. 
Overall, taking these effects into account, the adjusted fiscal effort would increase to 
2.9  pps.,  above  the  recommended  effort  under  the  revised  EDP  recommendation. 
Apart  from  recapitalisation  measures,  the  budgetary  deviation  in  2012  is  linked  to  a 
combination  of  weaker-than-expected  revenues  (taking  into  account  the  impact  of 
discretionary measures and the base effect) and higher intermediate consumption and 
social transfers. The  less tax-rich growth composition and a stronger deterioration in 
the  labour  market  implied  major  revenue  shortfalls,  notably  of  direct  and  indirect 
taxes,  as  well  as  higher  social  expenditure.  Spain  adopted  sizeable  consolidation 
measures  during  2012,  amounting  to  around  4%  of  GDP,  including  around  1½%  of 
GDP on the revenue side and 2½% of GDP on the expenditure side. These measures 
partly compensated also for an underlying deterioration in the structural balance due to 
rising interest payments and higher social transfers. 

(12)  For  2013,  according  to  the  Commission  services'  2013  Spring  Forecast,  the 
government  deficit  is  projected  to  decline  to  6.5%  of  GDP,  compared  to  the  EDP 
target of 4.5% of GDP. The primary balance is expected to improve by 4.5 pps. (0.9 
pps  net  of  capital  transfers  into  banks).  Following  the  last  Council  recommendation, 
the  Spanish  government  presented  in  August  2012  a  multi-annual  budget  plan  for 

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2013-14, outlining some features of the consolidation strategy for the medium-term. In 
total, the budgetary impact of discretionary measures in 2013 is estimated to be about 
1% of GDP on the expenditure side and about 1½% of GDP on the revenue side. The 
expected budgetary deviation of around 2% of GDP compared with the EDP target is 
partly explained by the worse starting position. However, the main factor behind the 
deviation  is  the  unfavourable  growth  composition,  with  private  consumption 
contracting  more  strongly  and  the  labour  market  performing  worse  than  expected  in 
the  revised  EDP  recommendation.  The  Commission  services'  2013  Spring  Forecast 
projects the structural deficit to further narrow by 1.1 pps. in 2013, compared with a 
recommended  effort  of  2.5  pps.  Correcting  for  the  change  in  the  estimated  potential 
growth  and  for  higher-than  expected  revenue  shortfalls,  the  estimated  fiscal  effort 
improves by 1.4 pps., bringing the adjusted fiscal effort to 2.5% of GDP, in line with 
the  recommended  effort  in  the  revised  EDP  recommendation.  In  its  2013  Stability 
Programme, the Spanish government announced a general government deficit target of 
6.3%  of  GDP  for  2013,  to  be  underpinned  by  additional  consolidation  measures  of 
around EUR 3 bn. (0.3% of GDP) still to be adopted and implemented this year. 

(13)  For 2014, the headline deficit is expected to widen to 7.0% of GDP compared to  an 
EDP target of 2.8% of GDP. The primary deficit would widen by 0.4% of GDP. Apart 
from  the  base  effect,  the  expected  deviation  mainly  reflects  the  expiry  of  temporary 
measures taken in previous years and the fact that the planned consolidation measures 
for 2014 were not sufficiently specified in the August 2012 multi-annual budget plan 
to  be  included  in  the  Commission  services'  forecast.  Moreover,  the  composition  of 
economic growth would continue to be tax-poor, with social contributions and indirect 
taxes not rising in full proportion to nominal GDP. Interest payments would also keep 
rising due to a higher debt stock. According to the Commission services' 2013 Spring 
Forecast,  the  structural  deficit  is  projected  to  deteriorate  by  1.1  pps.,  compared  to  a 
recommended  improvement  of  1.9%  of  GDP.  Correcting  for  the  change  in  the 
estimated potential growth and unexpected revenue shortfalls, the gap increases by a 
further 0.2 pps. 

(14)  As  regards  fiscal  governance,  major  progress  has  been  made  in  the  reporting  of 
budgetary execution at sub-central government levels. However, the provisions of the 
Budgetary  Stability  Law  on  early  warning  and  corrective  mechanisms  to  limit 
budgetary  deviations  have  not  been  fully  effective  and  the  transparency  of  their 
implementation  could  be  enhanced.  Despite  progress  with  respect  to  budgetary 
reporting  at  regional  level,  achieving  higher  fiscal  transparency  would  require  more 
comprehensive,  consistent  and  timely  reporting,  also  of  budgetary  plans,  on  a 
consolidated  general  government  basis  in  line  with  ESA  95.  The  establishment  of  a 
fiscal council, with full institutional and financial independence, is still pending.  

(15)  General  government  gross  debt  rose  to  around  84%  of  GDP  in  2012  compared  to 
80.9% of GDP projected in the updated Commission services' 2012 Spring Forecast. 
The increase in the debt ratio was due to a higher than expected deficit outcome, lower 
nominal  GDP  growth,  costs  of  bank  recapitalisation  operations  and  the  payment  of 
public  administration  arrears.  According  to  the  Commission  services'  2013  Spring 
Forecast, the debt-to-GDP ratio is expected to increase further and to exceed 95% in 
2014, based on a no-policy-change scenario, thus exceeding the Treaty reference value 
in all years. 

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(16)  On 10 April 2013, the Commission concluded, based on its 2013 In-Depth Review on 
Spain  under  the  Macroeconomic  Imbalances  Procedure3,  that  Spain  is  experiencing 
excessive macroeconomic imblances. The correction of these imbalances accumulated 
during  the  boom  years,  and  in  particular  the  absorption  of  very  high  private  and 
external  debt  levels,  are  having  major  negative  consequences  on  economic  growth, 
financial stability and public finances. A sustainable correction of the excessive deficit 
in  the  medium-term  requires  simultaneous  progress  on  ensuring  the  correction  of 
macroeconomic  imbalances,  supported  by  structural  reforms  to  boost  growth  and 
employment creation and to reduce structural rigidities that hamper the adjustment.  

(17)  According to the Commission services' 2013 Spring Forecast, Spain will not meet the 
nominal  budgetary  targets  established  in  the  Council  Recommendation  of  10  July 
2012.  However,  Spain  has  implemented  a  structural  effort  in  2012  and  2013  which, 
account  taken  of  the  unexpected  adverse  economic  developments  compared  to  when 
the  Council  recommendation  was  issued,  is  in  line  with  the  revised  EDP 
recommendation.  These  unexpected  adverse  economic  developments  have  entailed 
major  unfavourable  consequences  for  government  finances.  In  particular,  significant 
revenue  shortfalls  linked  to  the  on-going  rebalancing  of  the  economy  towards  a  less 
tax-rich  growth  structure  and  associated  negative  effects  on  revenue  elasticites  have 
led  to  a  substantial  deterioration  in  the  budgetary  position.  Moreover,  the  economic 
recession  has  affected  employment  in  a  very  negative  way  and  unemployment  has 
risen  sharply.  Considering  all  these  factors,  consistent  with  the  rules  of  the  Stability 
and  Growth  Pact  and  including  the  need  to  correct  excessive  macroeconomic 
imbalances with major unfavourable consequences for public finance, an extension of 
the deadline for correcting the excessive deficit in Spain by two years to 2016 appears 
to be warranted.  

(18)  Against  the  background  of  high  uncertainties  regarding  economic  and  budgetary 
developments, the budgetary target recommended for the final year of the correction 
period should be set at a level clearly below the reference value, in order to guarantee 
an effective and lasting achievement of the correction within the requested deadline. 

(19)  The  intermediate  headline  deficit  targets  leading  to  the  correction  of  the  excessive 
deficit by 2016 are set at 6.5% of GDP for 2013, 5.8% of GDP for 2014, 4.2% of GDP 
for  2015,  and  2.8%  of  GDP  for  2016.  Achieving  these  targets  requires  an  annual 
improvement  in  the  primary  balance  (net  of  one-off  measures)  of  1.3%  of  GDP  on 
average over the period 2013-16 and, on the basis of the Commission services' 2013 
Spring Forecast extended to 2016, an improvement in the structural budget balance of 
1.1% of GDP in 2013, 0.8% of GDP in 2014, 0.8% of GDP in 2015, and 1.2% of GDP 
in  2016.  This  more  gradual  adjustment  path  takes  into  account  the  current  difficult 
economic  environment  and  the  on-going  major  structural  transformation  of  the 
Spanish  economy  and  will  have  to  be  supported  by  ambitious  structural  reforms.  As 
such, it is expected to support the unwinding of external and internal macroeconomic 
imbalances,  mitigate  the  negative  short-term  impact  of  fiscal  consolidation  on 
economic  growth,  while  still  stabilising  and  reversing  the  upward  trend  in  general 
government debt.  

(20)  According to the Commission services' 2013 Spring Forecast extended to 2016, which 
is based on a no-policy change assumption, no additional measures appear needed at 

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this stage to achieve the recommended improvement in the structural balance for 2013 
(and  the  new  6.5%  of  GDP  deficit  target),  but  the  budgetary  plans  at  all  levels  of 
government will have to be strictly implemented. For the period 2014-2016, bringing 
the  deficit  below  the  Treaty  reference  value  on  a  sustainable  basis  will  require 
considerable  structural  fiscal  measures  on  top  of  those  already  included  in  the 
Commission services' 2013 Spring Forecast. Those measures, amounting to around 2% 
of  GDP  in  2014,  1%  of  GDP  in  2015,  and  1½%  of  GDP  in  2016  should  take  into 
account  the  need  to  compensate  for  the  negative  second-round  effects,  negative 
potential output growth, as well as rising interest and social payments. 

(21)  The  2013  Stability  Programme  envisages  an  adjustment  path  which  is  broadly 
consistent  with  the  correction  of  the  excessive  deficit  by  2016,  targeting  headline 
deficits of 6.3% of GDP in 2013, 5.5% in 2014, 4.1% in 2015, and 2.7% in 2016. For 
2013,  the  target  is  based  on  additional  consolidation  measures  of  around  EUR  3  bn 
envisaged in the programme, which still need to be fully specified. 

(22)  Budgetary consolidation measures should secure a lasting improvement in the general 
government balance, while being geared towards  enhancing the quality of  the public 
finances and reinforcing the growth potential of the economy. 

(23)  Spain  faces  high  risks  to  sustainability  in  a  medium-term  perspective  and  medium 
risks in the long run. Returning to a higher structural primary balance, around -0.5% of 
GDP  as  it  was  on  average  in  the  period  1998-2012,  would  help  contain  these  risks. 
The 2013 reform of early retirement schemes is expected to contribute to the long-term 
sustainability of the social security system. However, further measures to contain age-
related expenditure growth appears necessary, e.g. via the appropriate regulation of the 
sustainability factor foreseen by the 2011 reform of the pension system, including by 
providing that the retirement age will rise in line with gains in life expectancy.  

(24) 

In view of the decentralised nature of its public finances, Spain's fiscal adjustment path 
should be underpinned by a credible medium-term consolidation strategy that includes 
(i) a detailed multi-annual budget plan with full specification of measures for 2014-16, 
(ii)  further  strengthening  the  effectiveness  of  the  institutional  framework  (by  raising 
further the transparency in implementation of the Budgetary Stability Law as well as 
by establishing an independent fiscal council), (iii) undertaking concrete steps to rein 
in  the  mounting  structural  deficit  in  the  social  security  system,  and  (iv)  giving  a 
greater  emphasis  to  the  growth  friendliness  of  the  consolidation  (including  by 
conducting systematic expenditure reviews as well as reviews of the tax system). 

(25) 

In  parallel  to  the  regular  reviews  of  the  ESM  Financial  Assistance  for  the 
Recapitalisation of Financial Institutions in Spain4 and as agreed in the Memorandum 
of Understanding signed on 23 July 2012, monitoring of progress on implementation 
of Spain's EDP commitments will be carried out on a quarterly basis. 

(26)  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, 

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HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

(4) 

Spain should put an end to the present excessive deficit situation by 2016. 

Spain should reach a headline deficit target of 6.5% of GDP in 2013, 5.8% of GDP in 
2014,  4.2%  of  GDP  in  2015,  and  2.8%  of  GDP  in  2016,  which,  based  on  the 
Commission services' 2013 Spring Forecast extended to 2016, is consistent with an 
improvement of the structural balance of 1.1%, 0.8%, 0.8%, and 1.2% of GDP in the 
years 2013-2016 respectively.  

Spain should implement the measures adopted in the 2013 budget plans at all levels 
of  government  and  stand  ready  to  take  corrective  action  in  case  of  deviations  from 
budgetary  plans.  The  authorities  should  reinforce  the  medium-term  budgetary 
strategy  with  well-specified  structural  measures  for  the  years  2014-16  that  are 
necessary to achieve the correction of the excessive deficit by 2016.  

The Council establishes the deadline of 1 October 2013 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. 

Furthermore, the Spanish authorities should (i) strengthen the effectiveness of the institutional 
framework  by  raising  further  the  transparency  in  implementation  of  the  Budgetary  Stability 
Law as well as by establishing an independent fiscal council to provide analysis, advice and 
monitor compliance of fiscal policy with national and EU fiscal rules, (ii) undertake concrete 
steps to rein in the increasing structural deficit in the social security system, and (iii) give a 
greater  emphasis  to  the  growth  friendliness  of  the  consolidation,  including  by  conducting 
systematic reviews of expenditure and the tax system. In addition, to ensure the success of the 
fiscal  consolidation  strategy,  it  will  be  important  to  back  the  fiscal  consolidation  by 
comprehensive  structural  reforms,  in  line  with  the  Council  recommendations  addressed  to 
Spain in the context of the European Semester and the Macroeconomic Imbalances Procedure. 

This recommendation is addressed to the Kingdom of Spain. 

Done at Brussels,  

For the Council 
The President 

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