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, gross domestic product, public debt, public finance, stability pact

EUROPEAN 
COMMISSION 

Brussels, 7.7.2016  
COM(2016) 294 final 

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  

{SWD(2016) 241 final} 

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   EN 

 
 
 
 
  
 
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  

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(8) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

According  to  Article  126  of  the  Treaty,  Member  States  shall  avoid  excessive 
government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth  conducive  to  employment  creation.  The  Stability  and  Growth  Pact  includes 
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the 
implementation  of  the  excessive  deficit  procedure1,  which  was  adopted  in  order  to 
further the prompt correction of excessive general government deficits. 

The Council, acting upon a recommendation by the Commission, decided on 27 April 
2009,  in  accordance  with  Article  104(6)  of  the  Treaty  establishing  the  European 
Community, that an excessive deficit existed in Spain and issued a recommendation to 
correct the excessive deficit by 2012 at the latest in accordance with Article 104(7) of 
that  Treaty.  Since  then,  the  Council  has  issued  three  new  recommendations  to  Spain 
(on 2 December 2009, 10 July 2012 and 21 June 2013) on the basis of Article 126(7) 
of the Treaty on the Functioning of the European Union, which extended the deadline 
for  correcting  the  excessive  deficit  to 2013,  2014  and  2016  respectively.  In  all  three 
recommendations  the  Council  considered  that  Spain  had  taken  effective  action,  but 
unexpected  adverse  economic  events  with  major  unfavourable  consequences  for 
government finances had occurred2.   

(4) 

The  latest  Council  Recommendation  to  Spain  on  the  basis  of  Article  126(7)  of  the 
Treaty was issued on 21 June 2013. It recommended Spain to reach a headline deficit 

1 
2 

EN 

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

the  excessive  deficit  procedure  of  Spain  can  be 

to 

found  at: 

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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  that 
improvement,  Spain  was  asked  to  implement  additional  measures  amounting  to  2%, 
1% and 1.5% of GDP in 2014, 2015 and 2016, respectively. Furthermore, Spain was 
requested (i) to strengthen the effectiveness of the institutional framework by raising 
further the transparency in implementation of the Budgetary Stability Law as well as 
by establishing an independent fiscal council to provide analysis, advice and monitor 
compliance  of  fiscal  policy  with  national  and  Union  fiscal  rules,  (ii)  to  undertake 
concrete steps to rein in the increasing structural deficit in the social security system, 
and  (iii)  to  give  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.  

The  Commission  2013  spring  forecast,  extended  to  2016,  which  underpinned  the 
Council Recommendation of 21 June 2013, projected that the Spanish economy would 
contract by 1.5% in 2013 before growing by 0.9%, 1.4% and 1.9%, respectively, in the 
three subsequent years. Nominal GDP growth was forecast at 0.1% and 2.0% in 2013 
and 2014, respectively, and at 2.6% and 3.2% in the two following years.  

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,  based  on  the  Commission  2013  autumn 
forecast,  the  Commission  concluded  that  Spain  had  taken  effective  action  in 
compliance with the Council Recommendation of 21 June 2013, although it pointed to 
risks  of  non-compliance  in  2014.  On  that  basis,  the  Commission  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 held in abeyance.  

Risks  of  non-compliance  with  the  Council  Recommendation  of  21  June  2013  were 
highlighted again in subsequent assessments. In July 2014 the Council concluded that 
the  measures  underpinning  the  budgetary  strategy  set  out  in  the  2014  Stability 
Programme  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 in July 2015 concluded 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 pointed out risks to the achievement of the 
headline deficit targets.  

(5) 

(6) 

(7) 

(8) 

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  expected  excess  over  the  4.2%  of  GDP 

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intermediate  headline  balance  target  for  2015  and  the  fact  that  the  fiscal  effort 
achieved  until  then  fell  well  short  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.  To  that  end,  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.  

(9) 

A new assessment of the action taken by Spain to correct the excessive deficit by 2016 
in  response  to  the  Council  Recommendation  of  21  June  2013leads  to  the  following 
conclusions:  

–  Based  on  the  data  notified  by  Spain  in  spring  2016  and  validated  by  the 
Commission  (Eurostat)  on  21  April  2016,  the  general  government  deficit  was 
5.9% of GDP in 2014 and 5.1% of GDP in 2015, above the intermediate targets 
set  by  the  Council  of  5.8%  and  4.2%  of  GDP,  respectively.  The  2014  deficit 
outcome  suffered  from  a  downward  revision  of  nominal  GDP  carried  out  at  the 
time of the second EDP notification in October 2015 as well as deficit-increasing 
financial sector opearations worth 0.1% of GDP. The relaxation of fiscal policy in 
2015 had a large impact on the fiscal outcome.  

–  Based  on  the  Commission  2016  spring  forecast,  the  change  in  the  structural 
balance in 2015 is estimated at -1.0% of GDP, significantly less than the 0.8% of 
GDP  recommended  by  the  Council.  The  cumulative  change  in  the  structural 
balance  over  the  2013-2015  period  amounted  to  0.6%  of  GDP,  thus  falling 
significantly short of the 2.7% of GDP recommended by the Council. Moreover, 
when  adjusted  for  the  effects  of  revised  potential  output  growth  and  revenue 
windfalls  or  shortfalls  compared  to  the  baseline  scenario  underpinning  the 
recommendation,  the  structural  effort  amounts  to  -0.7%  of  GDP  in  2015  and  -
0.2%  of  GDP  over  2013-2015,  which  is  well  below  the  recommended  effort.  
When measured according to the bottom-up method, the fiscal effort amounts to -
0.5% of GDP in 2015 and there appears to have been no effort over the 2013-2015 
period,  against  recommended  efforts  of  1%  and  3%  of  GDP,  respectively. 
Consolidation  measures,  for  instance  in  the  context  of  the  reforms  of  the  public 
administration  and  the  pension  system,  were  insufficient  to  offset  the  impact  of 
some  expansionary  measures  implemented  in  2015,  such  as  personal  and 
corporate  income  tax  reductions  and  a  partial  pay-back  of  previously  foregone 
Christmas  bonuses,  and  the  upward  trend  in  expenditure  linked  to  population 
ageing.  

in 

that 

the  baseline  macroeconomic  scenario  underpinning 

–  Over  2013-2015,  Spanish  inflation  (as  measured  by  the  GDP  deflator)  was  well 
the 
below 
recommendation  (it  was  even  negative  in  2014,  at  -0.4%),  making  the 
achievement of the fiscal targets more difficult. However, the negative impact of 
low  or  even  negative  inflation  on  Spain's  fiscal  outcomes  was  largely  offset  by 
higher-than-expected  real  GDP  growth.  Despite  a  less  dynamic  evolution  of  the 
GDP deflator, the level of nominal GDP in 2015 turned out only 1% lower than 

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foreseen  in  the  baseline  scenario,  as  real  GDP  expanded  much  faster  over  the 
same period. Furthermore, fast job creation and a tax-rich composition of growth 
further benefitted the deficit reduction.   

–  Overall,  throughout  2014  and  2015,  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,  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 Council Recommendation of 21 June 2013. However, 
windfall  gains,  especially  in  2015,  were  not  used  to  accelerate  the  deficit 
reduction. Instead, fiscal policy was relaxed , in particular through the tax reform 
and dynamic expenditure growth.  

(10)  The Commission 2016 spring forecast projects a general government deficit of 3.9% 
of GDP in 2016 and 3.1% of GDP in 2017. The 2016 Stability Programme targets a 
deficit at 3.6% and 2.9% of GDP in 2016 and 2017, respectively. Therefore Spain is 
not set to achieve a timely and durable correction of its excessive deficit in 2016. The 
public-debt-to-GDP  ratio  declined  slightly  from  99.3%  in  2014  to  99.2%  in  2015, 
thanks  to  net  sales  of  financial  assets  more  than  offsetting  the  impact  of  the  deficit 
growing faster than nominal GDP growth. According to the Commission 2016 spring 
forecast,  the  debt  ratio  is  expected  to  rise  again  in  2016  to  100.3%  and  to  decline 
thereafter.  

rule 

(11)  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 
the  Council 
respective  deficit,  debt  and  expenditure 
Recommendation of 21 June 2013, Spain has further strengthened its domestic fiscal 
framework  by  amending  the  2012  Stability  Law  to  provide  incentives  for  public 
administrations to reduce public sector arrears to commercial suppliers and by creating 
in November 2013 an independent fiscal institution (AIReF). However, while Spain’s 
Stability Law includes tools to prevent and correct deviations from the domestic fiscal 
targets, the experience over 2014 and 2015 shows that they could have been used to a 
greater extent. 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.  

targets.  Since 

(12) 

In  December  2013  Spain  adopted  a  reform  revising  pension  indexation  and 
introducing as from 2019 an automatic adjustment of future retirees’ new pensions to 
take  account  of  changes  in  life  expectancy.  Moreover,  starting  in  June  2013,  it  has 
been implementing a public administration reform, with a view to reaping efficiency 
gains. At the same time, in 2014 Spain adopted a corporate and personal income tax 
reform, which had some positive features but was not fully funded.  

(13)  This 

to 

leads 

the  conclusion 

the  Council 
Recommendation  of  21  June  2013  has  been  insufficient.  Spain  did  not  reach  the 
intermediate target for the headline deficit in 2015 and is not forecast to put an end to 
its  excessive  deficit  by  2016.  The  fiscal  effort  falls  significantly  short  of  what  was 
recommended by the Council, and the fiscal stance was even relaxed in 2015,  

the  response  of  Spain 

that 

to 

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HAS ADOPTED THIS DECISION:  

Article 1 

Spain has not taken effective action in response to the Council Recommendation of 21 June 
2013. 

Article 2 

This Decision is addressed to the Kingdom of Spain. 

Done at Brussels, 

For the Council 
The President 

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