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 21 June 2013 with a view to bringing an end to the situation of an excessive government deficit Accompanying the document Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Spain in response to the Council Recommendation of 21 June 2013
Date: 2016-07-07
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Spain, budget deficit, budgetary control, budgetary equilibrium, economic forecasting, gross domestic product, macroeconomics, public finance, stability pact

EUROPEAN 
COMMISSION 

Brussels, 7.7.2016  
SWD(2016) 241 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 21 June 2013 with a 
view to bringing an end to the situation of an excessive government deficit 

Accompanying the document 

Recommendation for a COUNCIL DECISION 

establishing that no effective action has been taken by Spain in response to the Council 
Recommendation of 21 June 2013 

{COM(2016) 294 final} 

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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 21 June 2013 with a 
view to bringing an end to the situation of an excessive government deficit 

Accompanying the document 

Recommendation for a COUNCIL DECISION 

establishing that no effective action has been taken by Spain in response to the Council 
Recommendation of 21 June 2013 

{COM(2016) XXX final} 

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1. 

INTRODUCTION  

On  27  April  2009,  the  Council  decided,  in  accordance  with  Article  104(6)  of  the  Treaty 
establishing the European Community (TEC) that an excessive deficit existed in Spain and in 
accordance  with  Article  104(7)  TEC  issued  a  recommendation  to  correct  it  by  2012.  Since 
then the Council issued three new recommendations to Spain on the basis of Article 126(7) of 
the Treaty on the Functioning of the European Union (TFEU), on 2 December 2009, 10 July 
2012 and 21 June 2013, extending the deadline for correcting the excessive deficit to 2013, 
2014 and 2016 respectively, as the Council considered that Spain had taken effective action, 
but  unexpected  adverse  economic  events  with  major  unfavourable  consequences  for 
government finances had occurred.1 

Specifically, on 21 June 2013, in order to bring the general government deficit below 3% of 
GDP  in  a  credible  and  sustainable  manner,  Spain  was  recommended  to  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 was 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 based on the Commission 
2013 spring forecast extended to 2016. To achieve this improvement, additional fiscal policy 
measures  of  2%,  1%  and  1.5%  of  GDP  in  2014,  2015  and  2016,  respectively  were  deemed 
necessary. 

Spain was also asked to implement the measures adopted in the 2013 budget plans at all levels 
of  government  and  to  stand  ready  to  take  corrective  action  in  case  of  deviations  from 
budgetary  plans.  Moreover,  Spain  was  called  on  to  reinforce  its  medium-term  budgetary 
strategy with well-specified structural measures for the years 2014-2016.  

Furthermore,  Spain  was  requested  to  (i)  strengthen  the  effectiveness  of  the  institutional 
framework by raising further the transparency in implementation of its Stability Law as well 
as  by  establishing  an  independent  fiscal  institution  to  provide  analysis,  advice  and  monitor 
compliance  of  fiscal  policy  with  national  and  Union  fiscal  rules,  (ii)  to  undertake  concrete 
steps to rein in the increasing structural deficit in the social security system, and (iii) to give a 
greater  emphasis  to  the  growth  friendliness  of  the  consolidation,  including  by  conducting 
systematic  reviews  of  expenditure  and  the  tax  system.  Finally,  to  ensure  the  success  of  the 
fiscal  consolidation  strategy,  the  recommendation  also  pointed  out  that  it  was  important  to 
back the fiscal consolidation with comprehensive structural reforms, in line with the Council 
Recommendations  addressed  to  Spain  in  the  context  of  the  European  Semester  and  the 
Macroeconomic Imbalances Procedure. 

In  its  recommendation,  the  Council  established  a  deadline  of  1  October  2013  for  effective 
action to be taken in line with the provisions of Article 3(4) of Regulation (EC) No 1467/97. 
On  15  November  2013,  the  Commission  concluded  that  based  on  the  Commission  2013 
autumn forecast, Spain had taken effective action and considered that no additional steps in 
the excessive deficit procedure were necessary at that point in time. Since then the excessive 
deficit procedure has been kept in abeyance. 

However,  risks  of  non-compliance  with  the  Council  Recommendation  of  21  June  2013 
appeared  as  of  2014.  Based  on  its  assessment  of  the  2014  Stability  Programme  and  the 
Commission  spring  forecast,  in  July  2014  the  Council  concluded  that  the  measures 
1   All documents related to the excessive deficit procedure of Spain can be found 

at:http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/spain_en.htm . 

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underpinning the budgetary strategy needed to be specified further and that additional efforts 
were needed to fully comply with the Council Recommendation of 21 June 2013. Based on its 
assessment of the 2015 Stability Programme, the  Council concluded in July 2015 that there 
was a risk that Spain would not comply with the provisions of the Stability and Growth Pact.  

Similarly,  the  Commission's  Opinions  on  Spain's  Draft  Budget  Plans  for  2014,  2015  and 
2016,  have  all  concluded  that  Spain  was  at  risk  of  not  complying  with  the  rules  of  the 
Stability  and  Growth  Pact.  In  particular,  the  Commission  pointed  out  risks  related  to  the 
structural effort in the plans being lower than those recommended by the Council. Moreover, 
the Commission flagged risks to the achievement of the headline deficit targets. 

On  9  March  2016,  based  on  the  Commission  2016  winter  forecast,  the  Commission  also 
concluded that there was a risk of non-compliance with the deadline to correct the excessive 
deficit, given the still significant excess over the 4.2% of GDP intermediate headline balance 
target for 2015 and the 2.8% of GDP target for 2016 and the fact that the fiscal effort achieved 
until  then  fell  short  of  the  recommended  one.  On  that  basis,  the  Commission  issued  a 
recommendation  to  Spain  to  step  up  efforts  to  ensure  compliance  with  the  Council 
Recommendation of 21 June 2013. In particular, Spain was recommended (i) to take measures 
to  ensure  a  timely  and  durable  correction  of  the  excessive  deficit,  including  by  making  full 
use  as  appropriate  of  the  preventive  and  corrective  tools  set  out  in  Spain's  Stability  Law  to 
control for slippages at the sub-central government level from the respective deficit, debt and 
expenditure rule targets; and (ii) to report to the Commission on measures in response to the 
Commission Recommendation in its updated 2016 draft budgetary plan or, at the latest, in a 
dedicated section of its forthcoming 2016 Stability Programme.  

This  document  is  structured  as  follows.  Section  2  presents  the  recent  macro-economic  and 
budgetary  developments  and  outlook  for  2016-2017.  The  subsequent  section  reviews  the 
budgetary  implementation  over  the  2013-2016  period.  It  is  followed  by  a  section  assessing 
effective  action.  Section  5  discusses  developments 
the  Council 
Recommendation of 21 June 2013 regarding the fiscal framework. The last section concludes.   

response 

in 

to 

2.  RECENT MACRO-ECONOMIC DEVELOPMENTS AND OUTLOOK FOR 2016-2017  

In  2013,  real  GDP  contracted  by  1.7%,  a  slightly  deeper  decline  than  projected  in  the 
macroeconomic  scenario  underpinning  the  2013  EDP  recommendation.  This  difference  was 
compounded by a much weaker GDP deflator, leading to a nominal GDP contraction of 1.1% 
vs. the projected growth of 0.1%.  

After  the  Spanish  economy  came  out  of  recession  in  the  third  quarter  of  2013,  it  has 
experienced  a  strengthening  recovery,  also  thanks  to  reforms  undertaken  in  response  to  the 
crisis  and  the  successful  completion  of  the  financial  assistance  programme.  The  recovery  is 
accompanied  by  strong  job  creation,  in  a  context  of  continued  wage  moderation  and 
benefitting from the labour market reforms. Substantial external adjustment also took place, 
supported by cost-competitiveness gains. While in real terms, the recovery and the associated 
turnaround in the labour market are proving much stronger than projected at the time of the 
2013  EDP  recommendation,  price  developments  over  2013-2015  were  much  slower  than 
expected and were even negative in 2014. The assessment of budgetary developments since 
the  2013  EDP  recommendation  has  to  take  account  of  these  two  factors,  which  affect  the 
fiscal  consolidation  process  in  two  opposite  directions.  It  also  has  to  take  into  account  the 

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low-interest rate environment, which has helped the fiscal consolidation by reducing interest 
expenditure.   

In  2014,  real  GDP  expanded  by  1.4%,  compared  to  an  expected  0.9%  expansion  in  the 
baseline scenario.  

In 2015, Spain’s economy expanded by 3.2% in real terms, more than double the rate forecast 
in the baseline scenario underlying the EDP recommendation. Improved access to credit for 
both  firms  and  households  and  enhanced  confidence,  together  with  declining  oil  prices, 
supported  domestic  demand.  Specifically,  strong  private  consumption  was  underpinned  by 
solid  job  creation  and  subdued  price  developments,  which  sustained  households'  real 
disposable  income  in  a  context  of  continued  wage  moderation.  Investment,  especially  in 
equipment but also non-residential construction, continued to grow strongly. By contrast, as 
strong domestic demand fuelled imports, net exports proved negative for growth. In nominal 
terms, GDP expanded by 3.6%, more than one percentage point stronger than expected. As a 
result, and despite three years of lower-than-expected inflation, the level of nominal GDP in 
2015  was  only  marginally  below  the  expectation  in  the  baseline  scenario  underpinning  the 
EDP  recommendation,  which  by  definition  –  in  the  absence  of  structural  effort  –  was  not 
expected to bring Spain's deficit back below 3% of GDP by 2016. 

After  the  very  strong  first  half  of  2015,  growth  has  decelerated  somewhat  and  is  likely  to 
continue  to  moderate  in  2016  and  2017  while  remaining  robust.  Positive  labour  market 
developments,  improved  access  to  credit  for  firms  and  households,  and  low  oil  prices  are 
expected  to  continue  to  support  growth.  The  drag  on  domestic  demand  from  private  sector 
deleveraging  is  expected  to  fade  out.  Accordingly,  Spain’s  economy  is  forecast  to  grow  by 
2.6% and 2.5% in 2016 and 2017, respectively.  

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Table 1: Comparison of macroeconomic developments and forecasts 

2012

2013

2014

2015

2016

2017

Real GDP 
Baseline
EDP scenario
Current forecast

Nominal GDP

Baseline
EDP scenario
Current forecast

GDP deflator

Baseline
EDP scenario
Current forecast

Potential growth

Baseline
EDP scenario
Current forecast

Output gap
Baseline
EDP scenario
Current forecast

General government balance

Baseline
EDP scenario
Current forecast

General government debt

Baseline
EDP scenario
Current forecast

g
g
g

g
g
g

g
g
g

g
g
g

-1.4%
n.a.
-2.6%

-1.5%
-1.5%
-1.7%

0.9%
-0.5%
1.4%

-1.3%
n.a.
-2.6%

0.1%
0.2%
-1.1%

2.0%
0.5%
1.0%

0.1%
n.a.
0.0%

1.6%
1.7%
0.6%

1.0%
1.0%
-0.4%

1.4%
0.7%
3.2%

2.6%
1.9%
3.8%

1.2%
1.2%
0.6%

-0.9%
n.a.
-0.6%

-1.4%
-1.4%
-0.8%

-1.5%
-1.5%
-0.3%

-0.1%
-0.1%
0.0%

1.9%
0.9%
2.6%

3.2%
2.1%
3.5%

1.2%
1.2%
0.9%

0.6%
0.6%
0.4%

% POT
% POT
% POT

-4.6%
-4.6%
-7.5%

-4.6%
-4.6%
-8.3%

-2.3%
-3.7%
-6.7%

-0.8%
-2.9%
-3.7%

0.6%
-2.6%
-1.5%

n.a.
n.a.
2.5%

n.a.
n.a.
3.9%

n.a.
n.a.
1.4%

n.a.
n.a.
0.7%

n.a.
n.a.
0.3%

% GDP
% GDP
% GDP

-10.7%
n.a.
-10.4%

-6.8%
-6.5%
-6.9%

-7.5%
-5.8%
-5.9%

-6.5%
-4.2%
-5.1%

-6.1%
-2.8%
-3.9%

n.a.
n.a.
-3.1%

% GDP
% GDP
% GDP

84.2%
84.2%
85.4%

91.3%
91.3%
93.7%

96.8% 100.6% 103.3%
98.2% 102.8% 106.6%
99.3%

99.2% 100.3% 99.6%

n.a.
n.a.

3. 

BUDGETARY IMPLEMENTATION OVER 2013-2015 AND OUTLOOK FOR 2016 

3.1.  Budgetary implementation in 2013 

Despite  the  worse-than-expected  recession,  the  headline  deficit  contracted  from  10.4%  of 
GDP  in  2012  to  6.9%  of  GDP  in  2013,  missing  the  EDP  target  by  0.4%  of  GDP.  Net  of 
financial sector assistance, which had a very large impact in 2012, the deficit narrowed from 
6.7%  of  GDP  in  2012  to  6.4%  of  GDP  in  2013.  The  narrowing  was  due  to  the  impact  of 
discretionary measures more than offsetting the cyclical downturn and the increase in interest 
expenditure. Despite lower-than expected interest rates having a beneficial impact on interest 
expenditure,  the  fast  increase  in  the  debt  ratio  still  resulted  in  higher  interest  expenditure. 
Among the measures with the largest deficit-reducing impact in 2013, there are the increases 
in VAT rates legislated in 2012 and in some excise duties. On the expenditure side, measures 

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focused  on  the  continuation  of  public  sector  wage  and  hiring  freezes,  structural  reforms  to 
improve the efficiency of spending in health and education, public administration reforms and 
reforms to early retirement and pension indexation. Although the headline target was missed, 
the  Commission  considered  that  there  was  effective  action  on  account  of  the  fiscal  effort 
being met.   

Table 2: Budget implementation 2013-2015 and prospects for 2016 

2013

2014

2015

2016

(% of GDP)

Outturn

Outturn

Outturn

Forecast

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, 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
GGB excl. one-offs
Output gap
Cyclically-adjusted balance
Structural balance (SB)

Source: Commission 2016 spring forecast 

38.2

11.2
10.2
12.4
4.5
45.1

41.8

11.1
5.3
19.3
1.1
2.2
2.8
3.4
-6.9
-3.5
-0.4
-6.5
-8.3
-2.4
-2.0

38.6

11.5
10.1
12.5
4.5
44.5

41.1

11.0
5.3
19.1
1.1
2.1
2.5
3.4
-5.9
-2.5
-0.4
-5.5
-6.7
-2.3
-1.9

38.2

11.7
10.1
12.2
4.2
43.3

40.3

11.0
5.2
18.4
1.2
2.5
2.1
3.1
-5.1
-2.0
-0.2
-4.9
-3.7
-3.1
-2.9

38.2

11.9
9.9
12.2
4.1
42.1

39.2

10.7
4.9
18.0
1.1
2.3
2.3
2.9
-3.9
-1.1
0.0
-3.9
-1.5
-3.1
-3.1

3.2  Budgetary implementation in 2014 

Although  nominal  growth  in  2014  was  slower  than  originally  foreseen,  due  to  much  lower-
than-expected inflation, the government deficit only narrowly missed the EDP target for 2014, 
reaching 5.9% of GDP. Excluding financial sector assistance, the deficit was 5.8% of GDP. 
The  narrowing  of  the  deficit  was  facilitated  by  the  favourable  economic  environment,  in 
particular  a  pick-up  in  revenue  growth  and  a  stabilisation  of  interest  expenditure  and  social 
transfers,  where  falling  unemployment  benefits  more  or  less  offset  the  increase  in  pension 
expenditure. Discretionary measures on the revenue side positively contributed to the bottom-
up measure of the fiscal effort in the amount of 0.6% of GDP.  The measures included some 
additional hikes in excise duties, a further reduction in tax exemptions for corporate income 
tax  and  some  revenue-increasing  measures  by  regional  authorities.  Similarly  to  2013,  some 
expenditure retrenchment was supported by the continuation of public sector wage and hiring 
freezes,  structural  reforms  to  improve  the  efficiency  of  spending  in  health  and  education, 
public  administration  reforms  and  reforms  to  early  retirement  and  pension  indexation. 
However,  these  measures  simply  offset  the  impact  of  rising  expenditure,  yielding  a  zero 
contribution to the bottom-up measure of fiscal effort. Moreover, there was a one-off deficit-

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increasing  impact  of  about  0.2%  of  GDP  from  compensation  claims  related  to  the  fuel  tax 
judged illegal by the European Court of Justice (the so called "céntimo sanitario"). 2  

3.3  Budgetary implementation in 2015 

Despite stronger-than expected economic growth in 2015, in both real and nominal terms, the 
EDP  headline  deficit  target  was  missed  by  a  wide  margin,  reaching  5.1%  of  GDP  in  2015, 
versus a target of 4.2%.3 The reason behind the slippage is twofold. On the one hand, the cuts 

2 See European Court of Justice Judgement in Case C-82/12 
3 Slippages in relation to domestic targets were concentrated at the regional level, where the deficit turned out 
0.9 pp. higher than the targeted 0.7% of GDP, and the social security system with a deficit of 1.3% of GDP, 0.7 
pp. above its target. The central and local governments over-performed their respective targets by a total of 0.6 
pp. In parallel, the central, regional and local governments failed to comply with the Stability Law's expenditure 
rule, whereby the variation in the eligible expenditure of the central, regional and local governments should not 
exceed the reference rate of medium-term growth of Spain's GDP (1.3% in 2015) 

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to the personal income tax implied a revenue loss of almost 0.4 % of GDP, partly offsetting 
the  impact  of  revenue-raising  measures.  On  the  other  hand,  expenditure  slippages  at  both 
central  and  regional  government  level  more  than  offset  the  impact  of  deficit-reducing 
expenditure trends, i.e. another year of virtually stable social transfers and a more than 0.3 pp 
fall in interest expenditure. The budgetary outcome was also adversely affected by a few one-
off factors. They include a decision by Eurostat to reclassify some private-public partnership 
(PPP)  projects  as  public  investment  with  a  negative  impact  on  the  deficit  in  2015  of  about 
0.2% of GDP as well as support to the financial sector of 0.1% of GDP. They also include the 
part of the payback of the foregone 2012 Christmas bonus that followed from a Court ruling 
(0.1% of GDP). There was also a one-off affecting the budgetary outcome in a positive way, 
owing to the sale of UMTS licences having decreased capital expenditure by 0.2% of GDP in 
2015.  

In 2015, the debt ratio was more or less stable, thanks to a stock-flow adjustment in the form 
of net sales of financial assets compensating for the still negative deficit-growth dynamic. 

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Table 3: Main discretionary measures in 2013-2016 (% of GDP) 

Revenues 

•  Hikes in personal income  tax (including 

on non-residents) (0.2% of GDP) 

•  Hikes  in  Value  Added  Tax  (0.8%  of 

• 

GDP) 

2013 
•  Cancellation of the 2012 Christmas bonus (0.5% 

Expenditure

of GDP) 
Public employment restraint measures (−0.3% of 
GDP) 

•  Hikes in excise duties and environmental 

• 

taxes (0.3% of GDP) 
Social  security  contributions  (0.2%  of 
GDP) 

•  Employment policies (−0.3% of GDP) 
•  Expenditure on long-term care (−0.1% of GDP) 
•  Regional measures, excluding public 

employment restraint measures (−0.7% of GDP)  

•  Regional  government 

tax  measures 

•  Local measures, excluding public employment 

(0.2% of GDP)  

restraint measures (−0.1% of GDP)  

•  Local government tax measures (0.1% of 

•  Other measures at central government level 

GDP) 

(−0.4% of GDP) 

2014 

•  Corporate income tax - Changes to 

deductibility of depreciation expense and 
asset revaluation levy (−0.1% of GDP) 

•  Value Added Tax (−0.1% of GDP) 
• 

Social security contributions (0.1% of 
GDP) 

•  Regional government tax measures 

(0.1% of GDP) 

•  Local government tax measures (0.1% of 

GDP) 
Fight against tax fraud (0.1% of GDP) 

• 

• 

• 
• 

• 
• 
• 

Public employment restraint measures (−0.1% of 
GDP) 
Employment policies (−0.1% of GDP) 
Public administration reform (CORA) (−0.1% of 
GDP) 
Regional measures (−0.2% of GDP) 
Pension reform (−0.1% of GDP) 
Compensation claims related to the fuel tax 
judged illegal by the ECJ ( "céntimo sanitario") 
(0.2% of GDP) 

in  personal 

•  Reduction 

tax 
(including  on  non-residents)  (−0.3%  of 
GDP) 
•  Reduction 

in  corporate 

income 

income 

tax 

(−0.3% of GDP) 

•  Value Added Tax (0.1% of GDP) 
•  Local government tax measures (0.1% of 

GDP) 
Fight against tax fraud (0.1% of GDP) 

• 

2015 

• 

• 

Partial  repayment  of  2012  Christmas  bonus 
(0.1% of GDP) 
Public employment restraint measures (−0.1% of 
GDP) 

•  Other  public  employment  measures  at  regional 

• 

• 

• 
• 

level (0.1% of GDP) 
Public administration reform (CORA) (−0.1% of 
GDP) 
Local  public  administration  reform  (−0.1%  of 
GDP) 
Pension reform (−0.1% of GDP) 
Compensation  claims  related  to  the  fuel  tax 
judged illegal by the ECJ ( "céntimo sanitario") 
(−0.2% of GDP) 

income 

in  corporate 

Reduction 
(−0.1% of GDP) 
Reduction 
(−0.3% of GDP) 
Fight against tax fraud (0.1% of GDP) 

in  personal 

income 

tax 

tax 

• 

• 

• 

EN 

2016 
• 

• 

• 

• 

11 

Public  employment  restraint  measures  (−0.1% 
of GDP) 
Spending  cuts  (acuerdos  de  no  disponibilidad) 
at central government level (−0.2% of GDP)  
Spending  cuts  (acuerdos  de  no  disponibilidad) 
and  other 
regional 
saving  measures 
government level (−0.2% of GDP)  
Public  administration  reform  (CORA)  (−0.1% 
of GDP) 

at 

   EN 

 
Revenues 

in 

•  Reduction 

tax 
personal 
(including  on  non-residents)  (−0.1%  of 
GDP) 

income 

Expenditure
Local  public  administration  reform  (−0.1%  of 
GDP) 
Pension reform (−0.1% of GDP) 

• 

• 

2017 
•  Partial  repayment  of  2012  Christmas  bonus 

(−0.1% of GDP) 

•  Pension reform (−0.1% of GDP) 

•  Fight against tax fraud (0.1% of GDP) 

Note: The budgetary impact in the table is the impact reported by the national authorities. A positive sign implies 
that revenue / expenditure increases as a consequence of this measure.  

Source: 2016 Stability Programme, 2016 and 2015 Draft Budgetary Plans.   

3.4  

Projected budget developments in 2016 

The  Commission  2016  spring  forecast  projects  the  general  government  deficit  to  continue 
narrowing  to  reach  3.9%  of  GDP  in  2016.  That  improvement  is  again  mainly  due  to  the 
cyclical recovery, which is expected to continue supporting tax revenues and keeping social 
transfers  in  check.  In  particular,  while  pension  expenditure  is  expected  to  continue  rising, 
falling  unemployment  should  reduce  the  growth  of  social  transfers  in  the  near  future. 
Furthermore, previous improvements in financing conditions and the decelerating public debt 
ratio imply that interest expenditure is likely to continue to fall. The reduction in the general 
government  deficit  is  also  the  result  of  new  saving  measures  at  central  and  regional 
government  level  decided  by  the  caretaker  government  in  response  to  the  Commission 
Recommendation  of  March  2016.  In  particular,  the  government  announced  that  it  would 
implement  provisions  in  domestic  legislation  to  enforce  fiscal  discipline  on  regional 
governments. To that end, on 6 April, it called on 12 regional governments to approve cuts in 
budget appropriations to ensure compliance with their deficit targets. For 2016, the target for 
each region was set at -0.7% of GDP on 20 April, up from -0.3% originally. Furthermore, on 
29  April  2016,  the  government  adopted  cuts  to  budgetary  appropriations  at  central  level  by 
EUR  2  billion.  According  to  the  2016  Stability  Programme,  total  savings  from  the  new 
measures at central and regional level are estimated at around 0.4% of GDP. The Commission 
2016 spring forecast incorporates a deficit-reducing impact of about 0.3% of GDP from them 
−0.2 pp. at central government level and 0.1 pp at regional level.4 Together with the continued 
rationalisation at central government level (CORA) and the 2013 local administration reform, 
they are expected to rein in the rising trend in expenditure. These saving measures are subject 
to implementation risks, as they require active involvement by different tiers of government 
and strict enforcement. Furthermore, the above savings only partly offset the impact of other 
pre-existing expansionary measures, including the cuts to the corporate and personal income 
tax  enacted  in  November  2014,  the  second  pay-back  of  the  previously  foregone  Christmas 
bonus in 2012 as well as the upward trend in expenditure linked to population ageing.  

The expected deviation from the 2016 deficit target recommended in June 2013 is forecast to 
reach around 1.1% of GDP at unchanged policies. It is mainly explained by the worse starting 
position (base effect ¾% of GDP), but also by an insufficient fiscal effort in 2016. 

Finally, according to the Commission 2016 spring forecast, the debt ratio is expected to peak 
at  slightly  above  100%  of  GDP  in  2016,  thus  exceeding  the  Treaty  reference  value  in  all 
years. 

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4. 

EFFECTIVE ACTION IN 2013-2015 

4.1   Background information 

The assessment of effective action is based on the data notified by the Spanish authorities in 
April 2016 and validated by Eurostat, and the Commission 2016 spring forecast. It takes into 
account the economic and budgetary developments since the Council Recommendation of 21 
June 2013. The methodology for assessing effective action is the one endorsed by the Council 
in  June  2014.  The  assessment  starts  by  comparing  the  headline  deficit  target  and  the 
recommended improvement in the structural balance in the Council Recommendation with the 
headline deficit and the apparent fiscal effort, measured by the change in the structural budget 
balance. If the headline deficit and/or the required improvement in the structural balance are 
not achieved, a careful analysis is carried out. The careful analysis takes into account –via the 
adjusted  change  in  the  structural  balance  -  (i)  the  impact  of  revisions  in  potential  output 
growth and  (ii)  the impact of  revenue windfalls  or  shortfalls  compared  to  the  EDP  scenario 
underpinning  the  Council  Recommendation.  The  above  is  complemented  by  a  bottom-up 
assessment  of  consolidation  measures  undertaken  by  the  Spanish  government.  Relevant 
information on baseline and EDP macroeconomic scenario has already be presented in Table 
1.  

4.2  

 Headline targets and adjustment in the structural balance 

In  2013,  Spain  did  not  reach  the  recommended  headline  deficit  target  but  the  Commission 
concluded that the fiscal effort had been delivered.5 For 2014, the general government deficit 
was notified in spring 2015 at 5.8% of GDP, just reaching the intermediate deficit target set 
by  the  Council  for  that  year,  but  then  in  autumn  2015  it  was  revised  up  to  5.9%  of  GDP, 
marginally above the target, on account of a downward revision in the underlying GDP figure 
(i.e.  resulting  in  a  denominator  effect).  In  2015  Spain's  general  government  deficit  reached 
5.1% of GDP, well above the intermediate target set by the Council of 4.2% of GDP.   

Based on the Commission 2016 spring forecast, the structural balance in 2015 deteriorated by 
1%  of  GDP,  compared  to  a  recommended  structural  improvement  of  0.8%  of  GDP.  In 
cumulative  terms  over  2013-2015,  the  unadjusted  change  in  the  structural  balance  stood  at 
0.6%  of  GDP,  which  is  significantly  below  the  cumulative  recommended  structural 
improvement of 2.7% of GDP. This warrants a careful analysis.  

4.3.  Careful analysis  

The adjusted change in the structural balance amounts to -0.7% of GDP in 2015, leading to a 
gap of 1.5% of GDP vis-à-vis the recommended structural improvement of 0.8% of GDP. In 
cumulative terms over 2013-2015, the adjusted change in the structural balance equals -0.2% 
of GDP, which is again well below the recommended cumulative structural improvement of 
2.7% of GDP.  

The  fiscal  effort  based  on  the  bottom-up  method  yields  -0.5%  of  GDP  in  2015,  well  below 
what is deemed necessary to comply with the Council Recommendation of 21 June 2013 (1% 
of  GDP),  and  to  no  effort  over  the  2013-2015  period,  against  the  recommended  cumulative 
structural effort of 3% of GDP).  

For 2016 − i.e. the deadline for the correction of the excessive deficit set out in the June 2013 
recommendation  −  the  headline  deficit  is  forecast  to  reach  3.9%,  well  above  the  deficit 
reference  value  of  the  Treaty  and  the  recommended  deficit  target  of  2.8%  of  GDP.  The 

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unadjusted  and  adjusted  changes  in  the  structural  balance  are  both  projected  to  be  -0.2%  of 
GDP,  further  widening  the  gap  with  the  recommended  effort.  Also  based  on  the  bottom-up 
method, no fiscal effort is projected to be delivered by Spain in 2016, which implies falling 
significantly short of the 1.5% of GDP effort deemed necessary to achieve the target. 

Table 4: Compliance with the requirements of the corrective arm 

% of GDP
Headline balance

Headline budget balance
EDP requirement on the budget balance

Fiscal effort - change in the structural balance

Change in the structural balance
Required change from the EDP recommendation
Cumulative change in the structural balance
Cumulative required change from the  EDP recommendation

Fiscal effort- adjusted change in the structural balance

Adjusted change in the structural balance
Required change from the EDP recommendation
Cumulative change in the structural balance
Cumulative required change from the  EDP recommendation

Fiscal effort - calculated on the basis of measures (bottom up approach)

Fiscal effort (bottom-up)
Requirement from the EDP recommendation
Cumulative fiscal effort (bottom-up)
Cumulative requirement from the EDP recommendation 

Source: Commission 2016 spring forecast

5.   FISCAL FRAMEWORK   

2013

2014

2015

2016

-6.9
-6.5

1.4
1.1

0.9
1.1

-0.3
0.0
-0.3

-5.9
-5.8

0.1
0.8
1.5
1.9

-0.4
0.8
0.5
1.9

0.9
2.0
0.6
2.0

-5.1
-4.2

-1.0
0.8
0.6
2.7

-0.7
0.8
-0.2
2.7

-0.5
1.0
0.0
3.0

-3.9
-2.8

-0.2
1.2
0.4
3.9

-0.2
1.2
-0.4
3.9

0.0
1.5
0.0
4.5

Since 2012, Spain's fiscal framework has been strengthened in order to, among other things, 
prevent  deviations  and  ensure  compliance  by  all  government  levels  with  their  respective 
deficit,  debt  and  expenditure  rule  targets.  Since  the  Council  Recommendation  of  21  June 
2013, Spain has strengthened its fiscal framework further, namely by creating an independent 
fiscal  institution  (AIReF)  and  amending  its  2012  fiscal  responsibility  act  (i.e.,  the  Stability 
Law).  

In  particular,  AIReF  was  created  in  law  in  November  2013  and  became  operational  the 
following year. It is entitled to assess and deliver opinions on a large number of public finance 
developments.  The  amendments  to  the  Stability  Law  aim  to,  among  other  things,  give 
incentives  to  all  public  administrations  to  reduce  public  sector  arrears  to  commercial 
suppliers. They also provide for a sharper definition of corrective measures − such as cuts in 
budgetary appropriations (acuerdos de no disponibilidad) 6 − to ensure their effectiveness in 
correcting  deviations  from  fiscal  targets.  However,  while  the  Stability  Law  includes 
meaningful  tools  to  prevent  and  correct  deviations  from  fiscal  targets,  the  experience  over 
2014 and 2015 shows that these were not used to the needed extent on non-compliant public 
administrations.  Following  the  March  2016  Commission  Recommendation,  the  Spanish 
government  has  started  to  enforce  corrective  provisions  in  the  Stability  Law  that  had  not 
previously been implemented.  

The Council Recommendation of 21 June 2013 also called on Spain to take steps to rein in the 
increasing  structural  deficit  in  the  social  security  system,  and  give  greater  emphasis  to  the 
growth  friendliness  of  the  consolidation,  including  by  conducting  systematic  reviews  of 
expenditure  and  the  tax  system.  To  that  end,  in  December  2013,  Spain  adopted  a  reform 

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revising pension indexation and introducing as from 2019 an automatic adjustment of future 
retirees’  new  pensions  to  take  account  of  changes  in  life  expectancy.  However,  the  social 
security administration kept recording deficits over 2013-15, against the backdrop of sluggish 
growth  in  social  security  contributions,  which  was  partly  due  to  various  schemes  offering 
reduced  rates  for  new  permanent  contracts.  Furthermore,  since  June  2013,  Spain  has  been 
implementing  a  public  administration  reform,  with  a  view  to  eliminating  duplicated 
administrative  structures,  reducing  administrative  burdens,  streamlining  overheads  and 
rationalising the size of the central government’s public sector entities. Lastly, in 2014 Spain 
adopted a tax reform. It focused on corporate income taxation, where a broadening of the tax 
base  was  accompanied  by  a  lowering  of  tax  rates,  and  on  personal  income  taxation,  where 
rates were reduced across the board. Although some elements of the reform are steps in the 
right direction (such as the broadening of corporate income tax bases), the reform could have 
been  funded  by  shifting  revenues  towards  less  distortive  taxes,  such  as  consumption, 
environmental and recurrent property taxes. Its negative budgetary impact explains much of 
the  higher-than-planned  deficit  and  the  significant  worsening  of  the  structural  balance  in 
2015; it also weighs on the expected fiscal developments in 2016. 

Against  the  backdrop  of  a  relatively  high  number  of  possible  breaches  of  EU  public 
procurement  legislation  brought  to  the  Commission’s  attention  in  recent  years,  the  2016 
Country Specific Recommendations call on Spain to enhance control mechanisms for public 
procurement  and  coordination  of  procurement  policies  across  government  levels.  Evidence 
shows  that  there  are  disparities  in  the  implementation  of  public  procurement  across 
contracting  authorities  and  entities  and  that  insufficient  ex-ante  and  ex-post  control 
mechanisms hinder the correct and uniform application of public procurement legislation. The 
limited  use  of  centralised  or  joint  procurement  instruments  prevents  efficiency  gains  which 
would contribute to fiscal savings. The absence of an independent body in charge of ensuring 
efficiency  and  legal  compliance  in  public  procurement  throughout  the  country  hampers  the 
proper implementation of procurement rules and may create opportunities for wrongdoings. 

6. 

CONCLUSIONS  

After Spain's EDP was put in abeyance in November 2013, Spain narrowly missed the 2014 
headline  deficit  target  (on  account  of  a  downward  revision  of  GDP  in  autumn  2015,  which 
resulted in a denominator effect). In 2015 Spain's general government deficit reached 5.1% of 
GDP,  well  above  the  intermediate  target  of  4.2%  of  GDP  set  by  the  Council.  Since  2014, 
Spain delivered a much lower fiscal effort than recommended, measured both according to the 
unadjusted and adjusted change in the structural balance as well as to the bottom-up effort. In 
2015,  fiscal  policy  was  relaxed  with  personal  income  tax  cuts  and  expenditure  slippages 
contributing to a worsening of the structural balance. A low interest rate environment and a 
stronger-than-expected economic recovery, also thanks to reforms undertaken in response to 
the  crisis,  the  successful  completion  of  the  financial  assistance  programme  and  favourable 
labour market developments, have helped Spain to reduce its general government deficit. At 
the same time, the fiscal consolidation process was hampered by a negative inflation surprise 
relative to the macroeconomic scenario underpinning the EDP recommendation. However, in 
2015 the better-than-expected economic developments, in both real and nominal terms, were 
not used to accelerate the deficit reduction, but to allow a loosening of fiscal policy. 

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Annex 

Table A1: Adjustment of apparent structural effort for the revision in potential growth 
– details of calculation  
Forecast 
error 
(%) 

Correction coefficient 
(% of nominal pot. 
GDP) 

Pot. growth  
(COM 2016 
SF) 
(%) 

Structural 
expenditure 
(% of pot. GDP) 
(COM 2016 SF 
forecast) 

Pot. growth 
assumptions 
underlying the 
Council 
Recommendation 
(%)  

2013 
2014 
2015 
2016 

(1) 
-1.4 
-1.5 
-0.1 
0.6 

(2) 
-0.8 
-0.3 
0.0 
0.4 

(3)=(2)-(1) 
-0.6 
-1.1 
-0.1 
0.2 

(4) 
40.6 
40.3 
40.6 
41.2 

(5)=[(3) x (4)]/100 
-0.3 
-0.5 
0.0 
0.1 

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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 

June reco. 
(1) 

2016 SF  
(1’) 

June reco. 
(2) 

2016 SF 
(2’) 

June reco. 
(3) 

2016 SF 
(3’) 

June reco. 
(4) 

2016 SF 
(4’) 

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

2013 
2014 
2015 
2016 

2.2 
-4.1 
12.6 
11.6 

0.8 
5.4 
11.3 
13.5 

15.8 
-11.3 
2.1 
0.0 

16.8 
2.0 
-1.2 
-1.8 

0.1 
2.0 
2.6 
3.2 

-1.1 
1.0 
3.8 
3.5 

383.4 
379.3 
391.9 
403.5 

389.6 
390.4 
395.8 
407.1 

2.91 
0.12 
-3.54 
1.61 

=(5) 
expressed in 
% of nominal 
pot. GDP 
0.3 
0.0 
-0.3 
0.1 

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Table A3. Forecast of key variables for the computation of the fiscal effort under the 
baseline scenario 

α 

β 

n
w
o
d
-
p
o
t

s
r
e
t
n
E

p
u
-
m
o
t
t
o
b
s
r
e
t
n
E

Structural expenditure (% of potential GDP) 

Potential GDP growth (%) 

Current revenue (EUR billion national currency) 

Discretionary measures with impact on current  revenue (EUR billion 
national currency) 

Nominal GDP growth (%) 

p.m Elasticity on current revenue  

p.m Output gap (% of Pot. Output) 

Discretionary measures with impact on total  revenue net of one-offs and 
other temporary measures (EUR billion national currency) 

Total expenditure net of one-offs and other temporary measures (EUR 
billion national currency) 

Interest expenditure (EUR billion national currency) 

Total unemployment (in thousands) 

Unemployment benefits (EUR billion national currency, 2014) 

Source: Commission calculations based on spring 2016 forecast 

2016 

41.16
0.35
420.5

-1.765 

3.5

1.04
-1.5

-2.369

470.183

32.13
4567.3
25.813

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