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 10 July 2012 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: 2013-05-29
Institutions: European Commission
Subjects: Spain, budget deficit, budgetary equilibrium, economic statistics, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 383 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 10 July 2012 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(2013) 383 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 latest1, 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 procedure2.  

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.  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  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. 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  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  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.  Spain  was  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.  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 

1  

2  

EN 

All  documents 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/spain_en.htm 
OJ L 209, 2.8.1997, p. 6. 

the  excessive  deficit  procedure  for  Spain  can  be 

related 

to 

found  at: 

2 

   EN 

                                                 
adherence  to  the  budgetary  targets  throughout  the  year  for  all  the  levels  of  the  general 
government sector. 

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.  

2. 

RECENT MACRO-ECONOMIC DEVELOPMENTS  

After a short-lived recovery in 2011, when real GDP increased by 0.4% thanks to strong net 
exports,  the  economy  has  slipped  back  into  recession,  recording  negative  real  GDP  growth 
since the third quarter of 2011. The recession deepened in the second half of 2012, with the 
contraction  accelerating  to  0.8%  quarter-on-quarter  in  the  last  quarter  of  the  year,  partly 
reflecting the short-term impact of consolidation measures. In annual terms, GDP fell by 1.4% 
in 2012. According to the Commission services' 2013 Spring Forecast3, 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.  As  discussed  in  the  2013  In-Depth  Review  (IDR)  under  the 
Macroeconomic Imbalances Procedure4, the correction of large economic imbalances built up 
during  the  boom  period  will  be  a  drag  on  growth  over  the  medium-term.  Private  sector 
deleveraging,  very  high  unemployment,  tight  financing  conditions,  and  fiscal  consolidation 
are weighing down on domestic demand. Net exports are therefore likely to be the only source 
of  GDP  growth  over  the  forecast  horizon,  with  domestic  demand  remaining  a  drag.  The 
labour  market  situation  is  due  to  continue  to  deteriorate  and  the  already  very  high 
unemployment is likely to increase further in the short term. 

In the baseline no-policy-change scenario at the time of the revised EDP recommendation (the 
Commission  services'  updated  2012  Spring  Forecast'  for  Spain),  real  GDP  was  projected  to 
contract sharply in 2012 and start expanding again in the first half of 2013, yielding annual 
growth  rates  of  -1.9%  and  -0.3%  in  2012  and  2013,  respectively  (see  Table  1).  As  the 
recovery was expected to kick in earlier, annual real GDP in 2014 was forecast to reach 1.1%. 
Eventually,  real  GDP  growth  in  2012  turned  out  less  negative  than  foreseen  in  the 
Commission services’ updated 2012 Spring Forecast. This was mainly due to somewhat more 
resilient  domestic  demand  than  expected  at  the  time  of  the  revised  EDP  recommendation, 
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).  However,  compared  to  the  Commission  services'  updated  2012  Spring 
Forecast, the 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 worse macroeconomic outlook partly 

3  

4  

The  Commission  services'  2013  Spring  Forecast  had  a  cut-off  date  of  23  April.  It  takes  into  account 
budgetary  data  for  2012  validated  by  Eurostat  on  the  22  of  April  2013.  For  the  purpose  of  this 
document, the Spring Forecast has been extended to 2016. . 
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/op134_en.htm 

EN 

3 

   EN 

                                                 
reflects  the  fact  that  the  2013  Spring  Forecast  takes  into  account  additional  consolidation 
measures included in the 2013-14 budget plan and the 2013 budget.5  

Table 1: Comparison of macroeconomic developments and forecasts 

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

2011

2012

outturn COM SF12 COM SF13
-1.9

-1.4

0.4

2013
SP 2013 COM SF12 COM SF13
-0.3

-1.3

-1.5

2014
SP 2013 COM SF12 COM SF13
1.1

0.9

0.5

-1.8
-0.1
2.3
-1.5
1.0
-4.1
-0.2

-4.4
0.0
2.5
-4.0
0.9
-5.4
-0.8

-3.9
0.0
2.5
-4.2
0.1
-4.6
-0.9

-3.7
0.0
2.4
-3.5
1.4
-4.5
-1.5

-2.0
0.0
1.6
-1.5
0.6
-4.9
-0.9

-4.0
0.0
2.6
-3.4
1.6
-4.6
-1.4

-0.8
0.0
1.3
-0.2
1.4
-3.2
-0.8

-0.1
0.0
1.2
0.3
1.4
-3.0
-0.9

-0.4
0.0
1.3
0.0
1.0
-2.3
-1.5

Source : COM SF12 - Commission services' updated 2012 Spring Forecast; COM SF13 - Commission services' 2013 Spring Forecast covering the 
period 2012-2016; SP 2013 - Stability Programme April 2013

3. 

ASSESSMENT OF EFFECTIVE ACTION 

3.1  Background information 

the 

The current assessment of effective action is based on the Commission services' 2013 Spring 
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.  The 
the  Council 
assessment  starts  by  comparing 
recommendation,  the  apparent  fiscal  effort,  measured  by  the  change  in  structural  budget 
balance, and the adjusted structural effort. The adjustment of the structural balance takes into 
account (i) the impact of revisions in potential output growth compared to that underlying the 
growth scenario in the Council recommendation, and (ii) the impact on revenue of revisions 
of  the  tax  content  of  economic  activity  (composition  of  economic  growth  or  of  other 
windfalls/shortfalls)  relative  to  what  was  assumed  at  the  time  of  the  recommendation.  This 
top-down  approach  in  the  assessment  is  complemented  by  a  careful  analysis,  including  a 
bottom-up assessment of consolidation measures undertaken by the Spanish government.  

recommended 

fiscal  effort 

in 

Table  2  and  3  below  present  the  main  variables  used  in  the  assessment  of  effective  action. 
the  revised  July  2012  EDP 
Table  2  presents 
recommendation.  Table  3  summarises  the  key  budgetary  requirements  of  the  revised  EDP 
recommendation:  annual  nominal  targets  and  required  annual  adjustments  in  the  structural 
balance.  

the  baseline  scenario  underlying 

5  

Real GDP is expected to contract less in 2013 than envisaged in the 'EDP scenario' of the revised EDP 
recommendation (cf. Table 3), which is due to carry-over effects from 2012 and the fact that the change 
in the headline and structural deficit is lower than was anticipated in the EDP scenario. 

EN 

4 

   EN 

 
                                                 
Table 2: Baseline scenario underlying the recommendation addressed to Spain in July 
2012 

% of GDP 
Revenues  
Current revenues 
Discretionary measures with impact on 
current revenue (EUR bn)6 
Expenditure 
Real GDP growth (%)  
Nominal GDP growth (%)  
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m CAB methodology revenue elasticity  
p.m Apparent revenue elasticity 
p.m Output gap (% of pot. output) 

2011 
35.1 
35.3 

9.7 

44.0 
0.7 
2.1 
0.1 
-7.0 
-8.9 
1.1 

-4.2 

2012 
35.9 
36.1 

9.3 

42.2 
-1.9 
-1.0 
-0.8 
-4.3 
-6.3 
1.1 
0.9 
-5.3 

2013 
35.7 
35.9 

-1.8 

41.8 
-0.3 
0.3 
-0.9 
-4.1 
-6.1 
1.1 
-0.2 
-4.7 

2014 
34.7 
34.9 

-4.7 

41.1 
1.1 
2.5 
-0.9 
-5.1 
-6.4 
1.1 
0.5 
-2.8 

Table 3: EDP scenario underlying the recommendation addressed to Spain in July 2012 

% of GDP 
Real GDP growth (%) 
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m Output gap (% of pot. output) 

2011 
0.7 
0.1 
-7.0 
-8.9 
-4.2 

2012 
-1.9 
-0.8 
-4.3 
-6.3 
-5.3 

2013 
-2.1 
-0.9 
-1.8 
-4.5 
-6.5 

2014 
-1.1 
-0.9 
 0.1 
-2.8 
-6.8 

3.2 Assessment of effective action 

3.2.1 Budgetary implementation in 2012 

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 the figures 
for capital transfers to banks (which are considered as one-off operations), the corresponding 
deficits were 7.0% and 9.0% of GDP, respectively, implying an improvement in the general 
government deficit of close to 2 pps. Net of capital transfers into banks, the primary balance 
narrowed  by  2.4  pps.  from  -6.5%  of  GDP  in  2011  to  around  -4.1%  in  2012,  against  the 
background  of  an  economy  shrinking  by  1.4%.  By  level  of  government,  the  main 
consolidation effort was achieved at the regional and local level, with the regions in aggregate 
only missing the deficit target of 1.5% of GDP by slightly more than 0.2 pps. (although with 
considerable  variation  across  regions),  after  recording  a  deficit  of  more  than  5%  of  GDP  in 
2011. In contrast, the social security sector balance deteriorated by around 1 pp., resulting in a 
deficit of almost 1% of GDP. 

The revised EDP recommendation of 10 July 2012 required Spain to achieve an improvement 
in the structural balance of 2.7 pps. in 2012. The Commission services' 2013 Spring Forecast 
points to an improvement in the structural deficit of 1.8 pps, (see Table 4). Accounting for the 
slight  downward  revision  of  potential  output  since  the  time  of  the  revised  EDP 
recommendation  does  not  have  a  material  impact  on  the  adjusted  fiscal  effort  in  2012. 
However,  the  estimated  change  in  the  structural  balance  was  severely  affected  by  revenue 

6  

Measures clearly specified and committed to by government ahead of the recommendation. 

EN 

5 

   EN 

 
 
 
                                                 
shortfalls  compared  with  the  scenario  underlying  the  original  EDP  recommendation.  These 
shortfalls  amounted  to  around  1.0  pp.  Despite  additional  discretionary  current  revenue 
measures of almost EUR 8 bn taken since the EDP recommendation, actual current revenues 
in 2012 increased by almost EUR 3 bn less than foreseen at the time. Hence, this adds up to 
an  unexpected  revenue  shortfall  of  around  EUR  11  bn  compared  with  the  EDP 
recommendation. Overall, taking these effects into account, the estimated adjusted change in 
the  structural  balance  amounts  to  2.9  pps.,  above  the  effort  required  under  the  revised  EDP 
recommendation.  

Table 4: Composition of the budgetary adjustment 

2011

2012

outturn

% of 
GDP
35.7

SP April 
2012
% of 
GDP
35.1

COM   
SF 2012
% of 
GDP
35.9

COM SF 
2013     
% of 
GDP
36.4

SP April 
2013
% of 
GDP
37.0

2013
COM 
SF 2012
% of 
GDP
35.7

COM SF 
2013     
% of 
GDP
36.8

SP April 
2013
% of 
GDP
36.8

2014
COM   
SF 2012
% of 
GDP
34.7

COM SF 
2013      
% of 
GDP
35.9

9.9
9.6
13.2
3.1
45.2

9.8
9.5
13.0
2.9
43.6

9.9
10.2
12.8
3.0
42.2

10.2
10.1
12.9
3.2
47.0

10.8
10.4
12.5
3.2
43.3

9.8
10.1
12.6
3.2
41.8

10.7
9.9
12.8
3.4
43.3

10.8
10.5
12.3
3.2
42.3

9.8
9.6
12.3
3.0
41.1

10.6
9.2
12.5
3.6
42.9

42.7

41.2

39.0

44.1

40.0

38.5

40.0

38.8

37.8

39.4

11.6
5.9
18.2
1.1
2.9
3.0
2.5

-9.4
-7.0
-0.2
-7.2
-

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

10.9
4.9
18.5
0.9
1.9
1.9
3.2

-6.3
-3.1
0.2
-4.3
2.9

-1.9
0.9
-1.1

11.1
5.7
18.8
1.0
1.7
5.9
3.0

-10.6
-7.7
-3.0
-5.5
1.8

1.8
-1.4
0.1
-1.3

10.9
5.4
18.9
1.1
1.5
2.2
3.3

-6.3
-3.0
0.0
-4.3
1.2

-1.3
1.4
0.2

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

11.2
5.4
19.0
0.9
1.4
2.1
3.3

-6.5
-3.2
0.0
-4.4
1.1

1.3
-1.5
1.6
0.1

10.4
5.2
18.9
1.0
1.5
1.9
3.5

-5.5
-2.0
0.0
-3.9
0.4

0.5
1.4
1.9

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

10.9
5.4
19.0
0.9
1.3
2.0
3.5

-7.0
-3.6
-0.4
-5.5
-1.1

-0.9
0.9
1.0
2.0

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 (residual)
- 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 ('alpha')
Real GDP growth
GDP deflator
Nominal GDP

Source:  SP April 2012 - Stability Programme April 2012; SP April 2013 - Stability Programme April 2013; COM SF 2012 - Commission 
services' updated 2012 Spring Forecast; COM SF 2013 - Commission services' 2013 Spring Forecast covering the period 2012-2016.

EN 

6 

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Table 5: Change in structural balance corrected for revisions in potential output gap 
and revenue windfalls/shortfalls7 

Uncorrected fiscal 
effort ( SΔ ) 

Corrected fiscal effort 
*SΔ

(

)

  2012  2013  2014 
-1.1 
1.1 

1.8 

  2012  2013

2.9 

2.5 

2014 

-1.4 

ES 

Required fiscal effort in 
the latest Council 
recommendation (R) 
2014 

2012  2013

Deadline for 
correction 

2.7 

2.5 

1.9 

2014 

This  analysis  is  confirmed  by  a  more  in-depth  analysis  of  the  budgetary  developments  in 
2012, including a bottom-up assessment of measures taken. The improvement in the primary 
balance  of  around  2.4%  of  GDP  in  2012  (net  of  capital  transfers  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 sizeable consolidation 
measures  during  2012  (Table  6).  On  the  whole,  total  measures  of  around  4%  of  GDP  were 
adopted for 2012, including around 1½% of GDP on the revenue side and 2½% of GDP on 
the  expenditure  side.  Of  the  total  measures,  around  ¾%  of  GDP  consisted  of  one-off 
measures,  and  therefore  did  not  contribute  to  a  durable  improvement  in  the  budget  balance. 
Moreover, part of these measures compensated an underlying  deterioration in  the  budgetary 
position linked with rising interest payments and higher social spending and therefore are not 
reflected in an improvement in the structural balance. 

In nominal terms, the government and EDP target for the headline deficit in 2012 was 6.3% of 
GDP.  Apart  from  the  recapitalisation  measures,  the  deviation  from  the  target  is  linked  to  a 
combination  of  weaker-than-expected  revenues  (taking 
impact  of 
discretionary  measures  and  the  base  effect)  and  expenditure  overruns,  including  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.  As  a  result,  despite  an  increase  in 
VAT and personal and corporate income tax, current revenues remained weaker than expected 
at  the  time  of  the  revised  EDP  recommendation  when  adjusted  for  the  base  effect.  On  the 
expenditure  side,  slippages  of  around  ½  pp.  occurred  (net  of  base  effects  and  bank 
recapitalisations), mainly for intermediate consumption and social payments. 

into  account 

the 

Table 6: Main discretionary measures in 2012-2014 (% of GDP) 

Revenue 

Expenditure 

2012 

•  VAT and excise tax rate increases (0.2% 

of GDP) 

•  Changes to corporate taxation (0.4% of 

•  Cuts in public investment and other 
capital expenditure (1.0% of GDP) 
•  Cuts in health and education (0.4% of 

GDP) 

GDP) 

•  Personal income tax hike (0.7% of GDP) 
•  Revenue raising measures at regional 

level, e.g. increase in property taxes, etc 
(0.2% of GDP) 
Increase of fees in education and at 

• 

•  Elimination of Christmas bonus for 
public employees (0.4% of GDP) 
•  Reduction of public employment (0.2% 

of GDP) 

•  Unemployment benefit reform (0.2% of 

7  

Detailed calculations for these corrections are provided in the Annex. 

EN 

7 

   EN 

 
 
 
 
 
 
 
 
 
 
 
                                                 
central government level (0.1% of GDP) 

GDP) 

•  Total: 1.6% of GDP 

•  Total: 2.5% of GDP 

2013 

•  VAT and excise tax rate increases (1.1% 

•  Cuts in health and education (0.7% of 

of GDP) 

GDP) 

•  Personal income tax hike (0.1% of GDP) 
•  Revenue raising measures at regional 

•  Cuts in unemployment benefits (0.4% of 

GDP) 

level (0.1% of GDP) 

•  Freezing of public sector hiring (0.2% of 

•  Broadening of social security base (0.1% 

GDP) 

• 

of GDP) 
Increase of fees in education and at 
central government level (0.1% of GDP) 

•  Reintroduction of Christmas bonus for 
public employees (-0.4% of GDP) 
•  Capital transfer for covering electricity 

•  Total: 1.5% of GDP 

tariff deficit (-0.2% of GDP) 

•  Optimization of long-term care (0.1% of 

GDP) 

•  Total: 1.0% of GDP 

2014 

•  Expiry of changes to corporate taxation (-

•  Freezing of public sector hiring (0.2% of 

0.5% of GDP) 

GDP 

•  Expiry of personal income tax hike (-

•  Restricting early or partial retirement 

0.6% of GDP) 

•  Total: -1.1% of GDP8 

(0.1% of GDP) 

•  Local administration reform (0.2% of 

GDP) 

•  Total: 0.5% of GDP 

Note: Negative sign denotes a deficit increasing measure. Only measures yielding more than 
0.1% of GDP are listed. 

3.2.2 Budgetary developments in 2013 

According  to  the  Commission  services'  2013  Spring  Forecast,  the  government  deficit  is 
projected to decline to 6.5% of GDP in 2013, compared to the EDP target of 4.5% of GDP. 
The primary balance is expected to improve by 4.5 pps. (0.9 pp. net of capital transfers into 
banks)  (see  Table  4).  Despite  2013  being  another  year  of  contracting  domestic  demand,  the 
full-year  effect  of  the  increase  in  VAT  and  hikes  in  excise  duties  are  expected  to  result  in 
slightly  higher  total  revenues.  On  the  expenditure  side,  sizeable  cuts  in  intermediate 
consumption and gross fixed capital formation should offset the rise in interest expenditure, 
due  to  a  higher  debt  stock,  and  social  spending.  There  are,  however,  risks  to  this  scenario, 
notably on the revenue side, if similar shortfalls as in 2012 were to materialise. 

The  Commission  services'  2013  Spring  Forecast  projects  the  structural  deficit  to  narrow  by 
1.1  pps.  compared  with  a  recommended  effort  of  2.5  pps.  Correcting  for  the  change  in  the 
estimated  potential  growth  between 
revised  EDP 
recommendations and the 2013 Spring Forecast would improve the adjusted fiscal effort  by 

the  projections  underlying 

the 

8  

According  to  the  2013  update  of  the  Stability  Programme,  these  measures  are  to  be  extended/made 
permanent.  

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8 

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0.2 pp. Moreover, correcting for higher-than expected revenue shortfalls, the effort improves 
by  1.2  pps.,  bringing  the  change  in  the  adjusted  fiscal  effort  to  2.5%  of  GDP.  Despite 
additional discretionary current revenue measures of more than EUR 17.5 bn (around 1.7% of 
GDP) having been taken since the EDP recommendation, actual current revenues are expected 
to increase by only EUR 4 bn compared with what was foreseen at the time. Hence, this adds 
up to an unexpected revenue shortfall of close to EUR 13 bn (1.2% of GDP) compared with 
the  EDP  recommendation.  The  adjusted  fiscal  effort  is  in  line  with  the  required  effort 
according to the revised EDP recommendation. 

Following  the  revised  EDP  recommendation,  in  August  2012,  the  Spanish  government 
presented  a  multi-annual  budget  plan  for  2013-14,  outlining  some  features  of  the 
consolidation strategy for the medium-term. For 2013, the plan did not specify sizeable new 
revenue measures compared to what had already been announced in the July 2012 package, 
and which foresaw the VAT hike to have its main impact in 2013. On the expenditure side, a 
large share of the consolidation effort foreseen in the August plan stems from measures at the 
regional  level  (0.7%  of  GDP)  and  from  changes to  unemployment  benefits  (0.4%  of  GDP). 
To  these  measures,  the  2013  Budget  bill  added  a  few  new  measures  not  previously 
announced, such as an extension of the wealth tax by one year. A number of temporary and 
one-off  measures  expiring  in  2013  partly  offset  these  consolidation  measures  (e.g. 
reintroduction  of  Christmas  bonus,  corporate  income  taxes).  In  total,  the  amount  of 
discretionary  measures  impacting  on  2013  is  estimated  to  be  about  1%  of  GDP  on  the 
expenditure side and about 1½% of GDP on the revenue side. 

The expected deviation from the 2013 target recommended in July 2012 is forecast to reach 
around  2  pps  at  unchanged  policies.  This  is  partly  explained  by  the  worse  starting  position 
(base effect ¾% of GDP). 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  at  the  time  of  the  EDP  recommendation.  This  has 
made  economic  activity  less  tax  rich,  with  detrimental  impact  on  the  government  balance. 
Hence, despite additional discretionary revenue measures of about 1½% of GDP, the revenue 
ratio  is  expected  to  rise  by  only  ½  pp,  reflecting  major  revenue  shortfalls.  Also,  on  the 
expenditure  side,  additional  discretionary  measures  of  1  pps.  are  only  expected  to  lead  to  a 
decrease  in  the  expenditure  ratio  of  about  0.1  pp.  The  main  elements  preventing  a  further 
reduction in this ratio are higher interest payments and higher social transfers due to ageing 
and adverse developments in the labour market. 

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. 

3.2.3 Budgetary developments in 2014 

For 2014, the Commission services' 2013 Spring Forecast foresees real GDP growth of 0.9% 
under  a  no-policy  change  scenario.  The  expected  return  to  positive  economic  growth  and  a 
certain  stabilisation  in  the  labour  market,  however,  are  not  sufficient  to  achieve  a  further 
narrowing of the headline deficit, which is expected to widen to 7.0% of GDP compared to an 
EDP target of 2.8% of GDP. The few additional consolidation measures for 2014 specified so 
far (see below) are not enough to offset the expiry of temporary measures taken in previous 
years. The primary deficit is expected to widen by 0.4% of GDP to 3.6% in 2014. Apart from 
the base effect (2% of GDP), the expected deviation from the headline target mainly reflects 
the  expiry  of  temporary  measures  and  the  fact  that  the  planned  consolidation  measures  for 

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2014  were  not  sufficiently  specified  in  the  multi-annual  budget  plan  announced  in  August 
2012.  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  2013  Stability  Programme, 
submitted  after  the  cut-off  date  of  the  2013  Spring  Forecast,  announces  an  extension  of  the 
temporary  measures  that  were  to  expire  in  2014  (such  as  the  changes  to  the  corporate  and 
personal income taxation), additional unspecified savings at regional level and under the local 
administration  reform,  which  still  remains  to  be  adopted,  as  well  as  containment  of 
expenditure growth.  

The  main  discretionary  consolidation  measures  with  an  incremental  impact  in  2014  are  the 
freeze in public sector hiring (0.2% of GDP) and various measures restricting early or partial 
retirement (0.1% of GDP). The main discretionary measures that are expiring in 2014 are the 
2012  hikes  to  personal  income  tax  rates  (0.6%  of  GDP),  the  2012  changes  to  corporate 
taxation (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 fully included in 
the Commission services' 2013 Spring Forecast. 

The revised EDP recommendation of 10 July 2012 recommended Spain to achieve a structural 
fiscal  consolidation  of  1.9%  of  GDP  in  2014.  However,  according  to  the  Commission 
services' 2013 Spring Forecast, the structural deficit is projected to deteriorate by 1.1 pps. to 
5.5%  in  2014.  Correcting  for  the  change  in  the  estimated  potential  growth  between  the 
projections  underlying  the  revised  EDP  recommendations  and  the  2013  Spring  Forecast, 
would improve the estimated fiscal effort in 2014 by around 0.2 pp. However, adjusting for 
unexpected  revenue  developments  increases  the  gap  by  around  0.4  pp.  This  leaves  the 
adjusted  structural  effort  about  3¼  pps.  short  of  the  level  required  by  the  revised  EDP 
recommendation. 

3.2.4 Public debt 

General government  gross debt rose to around 84% of GDP  in 2012 compared to 80.9% of 
GDP projected in the Commission services' updated 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  repayment  of  public  administration  arrears 
(see below). 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. This increase in the debt ratio 
is  mainly  driven  by  higher  interest  payments  and  to  a  lesser  extent  by  the  dynamics  of  the 
primary deficit and low nominal GDP growth. The materialisation of downside risks related 
to  the  macroeconomic  scenario  and  the  budgetary  targets  would  imply  a  further  increase  in 
public debt. 

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 

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the 2011 reform of the pension system, including by providing that the retirement age will rise 
in line with gains in life expectancy. 

3.2.5 Budgetary framework 

In  the  revised  EDP  recommendation  of  July  2012,  Spain  was  also  recommended  to  strictly 
apply the new provisions of the Budgetary Stability Law regarding transparency and control 
of budget execution. The Law and the conditionality of the Regional Liquidity Fund appear to 
have contributed to contain deviation of regional budget outcomes from targets.  

Major  progress  has  been  made  regarding  a  more  transparent  and  timely  reporting  on 
budgetary  execution  at  different  levels  of  government  in  2012.  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  two  months.  Moreover,  since  October  2012,  monthly  reports  on  regional  public  finances 
are published on a budget execution basis with a month and a half delay. As of March 2013, 
monthly regional fiscal data are published in national accounts terms with a two-month lag. 
Some improvements in the municipalities' fiscal reporting have also been made with a delay 
in  reporting  of  maximum  three  months.  Despite  these  important  improvements  in 
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 information content of the data is reduced by the lack of long time 
series. Finally, information on arrears (outstanding amounts and payments) is incomplete. The 
government  has  disclosed  data  on  arrears  paid  through  the  Suppliers  Payment  Scheme  in 
2012. However, the scheme does not cover all regions and local entities and it targets invoices 
which remained unpaid as of 1 January 2012. 

There has been limited visible progress in enforcing the preventive and corrective arm of the 
Budgetary  Stability  Law  in  a  more  transparent  and  timely  manner.  The  early  warning 
mechanism  was  triggered  only  in  late  December  2012  despite  several  Autonomous 
Communities  being  at  risk  of  not  meeting  their  fiscal  targets  already  in  the  first  half  of  the 
year. This relatively late activation puts at risk the timely correction of emerging budgetary 
deviations.  Moreover,  the  implementation  of  the  corrective  mechanisms  could  have  been 
more  transparent.  To  illustrate,  the  publicly  available  assessments  of  the  economic  and 
financial plans do not give a detailed evaluation of measures adopted by the regions relative to 
the  targets.  Furthermore,  although  not  required  by  law,  the  early  warnings  (requerimientos) 
issued at the end of 2012 could have been published in the interest of transparency and raising 
credibility of the implementation of the law 

The  Regional  Liquidity  Fund  (RLF)  set  up  to  provide  affordable  financing  to  regions  that 
experience funding difficulties has been extended through 2013. 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. In 2013, the participating regions will be subject to stricter 
monthly  reporting  and  monitoring  requirements  on  their  cash  flow  position  in  exchange  for 
liquidity support. The funding mechanism has been modified: contrary to 2012 when part of 
the funding was provided by banks, in 2013 the funding needs of the regions will be covered 
entirely by the central government to reduce costs. The 2012 Suppliers Payment Scheme has 
been  extended  (for  the  remaining  EUR  2.6  bn  of  the  original  EUR  30  bn  allocation),  still 

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11 

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limited  to  commercial  debt  contracted  by  end-2011.  As  such,  the  scheme  can  increase  debt 
but has no impact on the deficit in accruals terms.  

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  which  was  to  become  operational  in  early  2013.9 
However,  the  setting-up  of  the  council  has  lagged  behind  schedule  and  the  government 
announced in the 2013 Stability Programme and National Reform Plan to aim at setting up the 
independent fiscal institution by end- 2013. The institution would thus not be able to play an 
effective role already in the 2014 budgetary planning procedure as originally foreseen.  

4. 

PROPOSED NEW FISCAL ADJUSTMENT PATH 

According  to  the  baseline  scenario,  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 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.  The  high  magnitude  of  these  shortfalls 
was  not  fully  expected  in  the  original  EDP  recommendation.  At  the  same  time,  the  actual 
decline in real GDP was less severe than expected. Yet, the economic recession 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  shortfall  of  current  tax  revenue  and  social  contributions  as  well  as 
higher expenditure on social transfers. 

As highlighted in the 2013 In-Depth Review under the Macroeconomic Imbalance Procedure, 
the correction of the large economic imbalances accumulated during the boom years, and in 
particular  the  absorption  of  very  high  private  debt  levels  and  the  need  to  rebalance  the 
economy towards a more export-led growth model, are having major negative consequences 
on  economic  growth  and  still  entail  risks  for  financial  stability.  The  on-going  correction  of 
these  imbalances  and  the  associated  economic  recession  entail  a  sharp  and  protracted 
worsening  of  public  finances  and  have  put  public  debt  on  a  steep  upward  path.  Continued, 
determined fiscal consolidation efforts are required to rein in the increase in public debt and to 
bring public finances back on a sustainable path. At the same time, it appears neither possible 
nor  desirable  to  fully  correct  the  negative  impact  of  the  adjustment  of  macroeconomic 
imbalances  on  public  finances  in  the  short  term.  A  sustainable  correction  of  the  excessive 
deficit in the medium-term requires simultaneous progress on ensuring a smooth correction of 
imbalances, supported by structural reforms to boost growth and employment creation and to 
reduce structural rigidities that hamper the adjustment. The path of fiscal consolidation needs 
to  reflect  also  possible  implications  for  the  correction  of  imbalances.    Considering  all  these 

9  

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

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factors and using the flexibility foreseen in the Stability and Growth Pact, an extension of the 
deadline for correcting the excessive deficit in Spain appears to be warranted.  

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 slightly below the reference value, in order to guarantee an effective 
and lasting achievement of the correction within the requested deadline. 

According to the new EDP scenario in Table 8, granting two additional years in the correction 
of the excessive deficit corresponds to intermediate headline deficit targets of 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.  The 
attainment  of  these  deficit  targets  is  consistent  with  an  annual  improvement  in  the  primary 
balance (net of one-off measures) of 1.3% of GDP on average over the period 2013-16. The 
improvement in the structural budget balance implied by the headline targets is 1.1% of GDP 
in  2013,  0.8%  of  GDP  in  2014,  0.8%  of  GDP  in  2015,  and  1.2%  of  GDP  in  2016.10  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  more  gradual  adjustment  path  takes  into 
account  the  current  difficult  economic  environment  and  the  on-going  major  structural 
transformation of the  Spanish  economy. As such,  it  is expected to support the  correction 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.  

According to the Commission services' 2013 Spring Forecast, which is based on a no-policy 
change  assumption,  no  additional  measures  appear  needed  at  this  stage  to  achieve  the 
recommended  improvement  in  the  structural  balance  for  2013  (and  the  new  6.5%  of  GDP 
headline  deficit  target),  but  the  budgetary  plans  at  all  levels  of  government  will  have  to  be 
strictly implemented . The situation will have to be monitored closely and further corrective 
action would have to be taken early on if deviations from budgetary plans were to materialise. 
For  the  period  2014-2016,  bringing  the  deficit  below  the  Treaty  reference  value  on  a 
sustainable basis will require implementing considerable additional structural fiscal measures, 
when  taking  into  account  the  need  to  compensate  for  the  negative  second  round  effects, 
subdued  growth  growth  prospects  as  well  as  rising  interest  and  social  payments.  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.  Based  on  current  estimates,  this  would 
require  an  amount  of  permanent  annual  measures  with  an  estimated  budgetary  impact  of 
around  2%  in  2014,  1%  in  2015,  and  1½%  of  GDP  in  2016.  This  is  based  on  the  need  to 
compensate for the expected deterioration in the underlying structural balance in the baseline 
scenario and to deliver the required structural effort in the EDP scenario. 

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  lower  deficit  target  is 
based on additional consolidation measures of around EUR 3 bn envisaged in the programme, 
which, however, remain to be fully specified. 

10  

The  required  structural  fiscal  efforts  have  to  be  interpreted  with  great  caution  given  the  major 
uncertainties  surrounding  the  methodological  estimation  of  potential  growth  and  output  gaps  in  an 
economy like Spain, facing profound structural transformations.  

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It  would  be  important  to  underpin  the  adjustment  path  by  a  credible  medium-term 
consolidation strategy that includes (i) a detailed multi-annual budget plan with well-specified 
structural  measures  for  the  years  2014-16,  (ii)  further  strengthening  the  effectiveness  of  the 
institutional  framework  (by  raising  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).  

Table 7:  Baseline scenario (Commission services' 2013 Spring Forecast) 

% of GDP 
Revenues  
Current revenues 
Discretionary measures with impact on 
current revenue (EUR bn)11 
Expenditure 
Real GDP growth (%)  
Nominal GDP growth (%)  
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m CAB methodology revenue 
elasticity12  
p.m Apparent revenue elasticity 
p.m Output gap (% of pot. Output) 

2011 
35.7 
35.8 

8.6 

45.2 
0.4 
1.4 
-0.2 
-7.2 
-9.4 

1.0 

-4.1 

2012 
36.4 
36.3 

17.1 

47.0 
-1.4 
-1.3 
-0.9 
-5.5 
-10.6 

1.0 

3.3 
-4.6 

2013 
36.8 
36.6 

15.8 

43.3 
-1.5 
0.1 
-1.4 
-4.4 
-6.5 

1.0 

-24.4 
-4.6 

Table 8: EDP scenario  

% of GDP 
Real GDP growth (%) 
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m Output gap (% of pot. output) 

2011 
0.4 
-0.2 
-7.2 
-9.4 
-4.1 

2012 
-1.4 
-0.9 
-5.5 
-10.6 
-4.6 

2013 
-1.5 
-1.4 
-4.4 
-6.5 
-4.6 

2014 
35.9 
35.4 

-11.3 

42.9 
0.9 
2.0 
-1.5 
-5.5 
-7.0 

1.0 

1.0 
-2.3 

2014 
-0.5 
-1.5 
-3.6 
-5.8 
-3.8 

2015 
36.1 
35.6 

2.1 

42.2 
1.4 
2.6 
-0.1 
-5.7 
-6.0 

1.0 

1.1 
-0.8 

2016 
36.1 
35.5 

0.0 

41.6 
1.9 
3.2 
0.6 
-5.9 
-5.6 

1.0 

0.9 
0.6 

2015 
0.7 
-0.1 
-2.8 
-4.2 
-2.9 

2016 
0.9 
0.6 
-1.6 
-2.8 
-2.6 

11  
12  

Measures clearly specified and committed to by government ahead of the recommendation. 
The standard revenue elasticity has been revised in line with the recently endorsed by EPC 
methodology for computing cyclically-adjusted balances. 

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5. 

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 of around 4% of GDP in 2012 and of 2½% of GDP in 2013, based on 
bottom-up  calculations.  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.  

For 2014, it appears that Spain has not yet taken sufficient measures 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. Moreover, the plan 
does  not  compensate  for  the  expiry  of  temporary  and  one-off  measures  in  that  year.  Thus, 
while effective action for 2012 and 2013 has been taken, the measures for 2014 fall short of 
the revised EDP recommendation. 

As regards fiscal governance, 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  have  not  been  implemented  in  a  transparent  and 
fully  effective  way.  This  could  lead  to  renewed  budgetary  slippages  at  the  regional  level, 
especially if funding conditions ease. 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.  Also,  it  would  be  important  to  overcome  the  delay  in  the 
establishment  of  the  fiscal  council  and  to  ensure  its  full  institutional  and  financial 
independence. 

The  substantial  deterioration  in  the  budgetary  position  resulting  from  significant  revenue 
shortfalls, linked to less-tax rich growth structure and worse labour market conditions, as well 
as from the weaker overall position of the economy than envisaged when the earlier Council 
recommendation  was  issued,  suggest  that  an  extension  of  the  deadline  for  correcting  the 
excessive  deficit  is  appropriate.  Granting  two  additional  years  for  the  correction  of  the 
excessive  deficit  would  correspond  to  intermediate  headline  deficit  targets  of  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.  The 
underlying improvement in the structural budget balance implied by these targets is 1.1% in 
2013,  0.8%  in  2014,  0.8%  in  2015,  and  1.2%  in  2016,  in  order  to  bring  the  headline 
government  deficit  below  the  3%  of  GDP  reference  value  by  2016.  The  structural  fiscal 
measures needed on top of those already included in the baseline scenario of the Commission 
services' 2013 Spring Forecast are estimated at around 2% in 2014, 1% in 2015, and 1½% of 
GDP in 2016.  

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15 

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Table 9: Comparison of key macroeconomic and budgetary projections 

Real GDP
(% change)

(

Output gap1
p
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 SF13
COM SF12
SP
COM SF13

COM SF12
SP

COM SF13
COM SF12
SP
COM SF13

COM SF12
SP

COM SF13
COM SF12
SP
COM SF13
COM SF12
SP
COM SF13
COM SF12
SP

2011
0.4
0.7
0.7
-4.1

-4.2
-3.8

-9.4
-8.9
-8.5
-7.0

-6.5
-6.1

-7.5
-6.9
-6.9
-7.2
-7
-7.3
69.3
68.5
68.5

2012
-1.4
-1.9
-1.4
-4.6

-5.3
-4.7

-10.6
-6.3
-10.6
-7.7

-3.1
-7.7

-8.4
-4.1
-8.40
-5.5
-4.3
-5.5
84.2
80.9
84.2

2013
-1.5
-0.3
-1.3
-4.6

-4.7
-4.5

-6.5
-6.1
-6.3
-3.2

-2.8
-3

-4.3
-4.1
-4.20
-4.4
-4.1
-4.3
91.3
86.8
91.4

2014
0.9
1.1
0.5
-2.3

-2.8
-3.2

-7.0
-6.4
-5.5
-3.6

-3.1
-2

-5.9
-5.1
-3.9
-5.5
-5.1
-3.9
96.8
91.8
96.2

2015
1.4
-
0.9
-0.8

-
-2.4

-6.0
-
-4.1
-2.5

-
-0.5

-5.7
-
-3.0
-5.7
-
-3.0
100.6
-
99.1

2016
1.9
-
1.3
0.6

-
-1.3

-5.6
-
-2.7
-2.1

-
0.9

-5.9
-
-2.1
-5.9
-
-2.1
103.3
-
99.8

Notes: 
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: COM SF13- Commission services' 2013 Spring Forecast covering the period 2012-2016; COM SF12 - Commission 
services' updated 2012 Spring Forecast; SP – Stability Programme April 2013

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16 

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Annex 

Table A1: Adjustment of apparent structural effort for the revision in potential growth 
– details of calculation  

Pot. growth 
assumptions 
underlying the July 
2012 recommendation 
(%)  
 (1) 

Pot. growth  
(COM 2013 
SF) 
(%) 
(2) 

Forecast 
error 
(%) 
(3)=(2)-(1) 

Structural 
expenditure 
(% of pot. GDP) 
(COM 2013 SF 
forecast) 
(4) 

Correction coefficient 
(% of nominal pot. 
GDP) 
(5)=[(3) x (4)]/100 

2012 
2013 
2014 

-0.8 
-0.9 
-0.9 

-0.9 
-1.4 
-1.5 

-0.1 
-0.5 
-0.5 

41.6 
41.1 
41.8 

0.0 
-0.2 
-0.2 

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Table A2: Adjustment of apparent structural effort for the revenue shortfalls/windfalls as compared to standard elasticities – details of 
calculation  

Change in current 
revenues (yoy) 
(EUR bn) 

Discretionary revenues 
measures 
(EUR bn) 

Nominal growth 
assumptions 
(%) 

Current revenues 
in t-1 
(EUR bn) 

Revenue gap 
(EUR bn) 

Correction 
coefficient 

CAB 
methodology 
revenue 
elasticity 
ε*=1.0 

July reco. 
(1) 

2013 SF  
(1’) 

July reco. 
(2) 

2013 SF 
(2’) 

July reco. 
(3) 

2013 SF 
(3’) 

July reco. 
(4) 

2013 SF 
(4’) 

(5)=[(1’)-(2’)- ε*x (3’) x 
(4’)]- 
[(1)-(2)- ε*x (3) x (4)] 

2012 
2013 
2014 

5.5 
-2.0 
-0.2 

0.9 
2.2 
-4.1 

9.3 
-1.8 
-4.7 

17.1 
15.8 
-11.3 

-1.0 
0.3 
2.5 

-1.3 
0.1 
2.0 

378.4 
383.9 
381.9 

380.3 
381.3 
383.4 

-11.5 
-12.8 
4.8 

=(5) 
expressed in 
% of nominal 
pot. GDP 
-1.0 
-1.2 
+0.4 

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