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 and the COUNCIL DECISION of 12 July 2016 establishing that no effective action has been taken by Spain in response to the Council Recommendation of 21 June 2013 Accompanying the document Recommendation for a COUNCIL DECISION giving notice to Spain to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit
Date: 2016-07-27
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Spain, budget deficit, budgetary control, budgetary equilibrium, gross domestic product, macroeconomics, multiannual financial framework, public expenditure, public finance, stability pact

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   EUROPEAN COMMISSION  Brussels, 27.7.2016  SWD(2016) 263 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 and the COUNCIL DECISION of 12 July 2016 establishing that no effective action has been taken by Spain in response to the Council Recommendation of 21 June 2013 Accompanying the document Recommendation for a  COUNCIL DECISION  giving notice to Spain to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit {COM(2016) 518 final}  
 
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. 

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. However, in autumn 
2015  it  was  revised  up  to  5.9%  of  GDP,  marginally  above  the  EDP  target,  on  account  of  a 
downward revision in the underlying GDP figure (i.e. resulting in a denominator effect). On 
31  March  2016,  the  Spanish  authorities  notified  to  Eurostat  a  deficit  outcome  for  2015  of 
5.2%  of  GDP,  later  revised  to  5.1%  of  GDP,  which  is  almost  1%  of  GDP  above  the  EDP 
headline  target  for  that  year.  Moreover,  the  change  in  the  structural  balance  in  2015  and 
cumulated  over  2013-15  have  fallen  short  of  the  targets  set  out  in  the  June  2013  Council 
Recommendation,  when  measured  both  in  adjusted  and  unadjusted  terms.  The  fiscal  effort 
based  on  the  bottom-up  method  in  2015  and  cumulated  througout  2013-15  were  also  well 
below what was deemed necessary to comply with the Council Recommendation of 21 June 
2013.  

On  12  July  2016,  following  a  Commission's  recommendation  in  compliance  with  Article 
126(8) TFEU, the Council adopted a decision establishing that no effective action had been 
taken by Spain in response to the 2013 Council Recommendation.2 In compliance with Article 
126(9),  within  two  months  from  the  Council  decision  establishing  non  effective  action  the 
Council shall give notice to the country on a new deadline for the correction of the excessive 
deficit with a specified adjustment path.3 

This  document  proposes  a  new  deadline  for  the  correction  of  the  excessive  deficit  and  an 
adjustment path that could ensure a durable correction of the excessive deficit.  To this  end, 
sections 2 and 3 present the recent macro-economic and budgetary developments and outlook 
for 2016-2018, respectively. Section 4 presents a proposal for a new fiscal adjustment path. 

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 . 

2   http://data.consilium.europa.eu/doc/document/ST-10793-2016-INIT/en/pdf  
3   In addition to the requirements of EDP recommendations under Article 126(7), the Council decision to give 
notice under Article 126(9) shall not only set the new budgetary targets but also "indicate measures conducive 
to the achievement of those targets" according to Article (5)1 of Council Regulation No 1467/1997. 

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Section  5  reviews  recent  developments  in  Spain's  fiscal  framework.  The  last  section 
concludes.   

2.  RECENT MACRO-ECONOMIC DEVELOPMENTS AND OUTLOOK FOR 2016-2018  

Real  GDP  expanded  by  3.2%  in  2015.  This  was  driven  by  strong  private  and  public 
consumption and buoyant investment, especially in equipment. In nominal terms, GDP grew 
by 3.8%.  

Growth  is  projected  to  remain  strong  in  2016.  The  Commission  has  updated  its  2016 
spring  forecast  with  information  available  until  19  July  2016.  The  update  includes,  among 
others,  the  quarterly  national  accounts  for  the  first  quarter  of  2016.  On  this  basis,  the  real 
growth  forecast  for  this  year  has  been  revised  upwards  by  0.3  pps.  of  GDP  compared  to 
spring,  to  2.9%,  due  to  stronger  than  projected  private  and  public  consumption  in  the  first 
quarter of the year, which more than offset weaker-than expected but still strong investment. 
The anticipated strength of private consumption can be explained by strong job creation and 
low  oil  prices.  At  the  same  time,  investment,  despite  moderating,  is  still  predicted  to  show 
robust growth, especially in equipment but also in residential construction. Exports have been 
revised  downwards  more  than  imports,  bringing  the  contribution  of  the  external  sector  to 
growth down to -0.4 pps. of GDP, 0.1 p.p. less than in Spring. However, the current account 
balance is expected to remain in surplus. Although growth is forecast to moderate during the 
second  half  of  this  year,  it  is  still  projected  to  remain  robust.  Nevertheless,  and  despite  the 
upward revision to real GDP growth in 2016, nominal growth is projected to be 3.4%, almost 
0.2 pps. of GDP lower than anticipated in the Commission spring forecast. The GDP deflator 
is now expected to be 0.5% in 2016, whereas HICP inflation is expected to be -0.3% this year, 
a downward revision of 0.2 pps. compared to spring.  

In 2017, real GDP is projected to decelerate, but still record a robust 2.3% expansion. 
This  is  0.2  pps.  of  GDP  less  than  in  the  Commission  spring  forecast.  The  composition  of 
growth  is  predicted  to  change  somewhat  with  respect  to  2016,  with  private  consumption 
moderating  on  the  back  of  lower  job  creation.  Nevertheless,  employment  growth  is  still 
expected to remain strong. At the same time, investment is forecast to pick up slightly, mostly 
due  to  accelerating  construction  investment,  especially  residential,  as  the  housing  market 
bottoms  out  and  financial  conditions  remain  favourable.  Investment  in  equipment  is  set  to 
decelerate  somewhat  on  account  of  greater  uncertainty.  Both  exports  and  imports  are  also 
forecast to accelerate, allowing Spain to still maintain a current account surplus. Inflation is 
predicted to recover gradually over 2017 on the back of higher oil prices, and a slightly lower 
euro towards the dollar, with nominal GDP growth reaching 3.6% in 2017, 0.3 pps. less than 
expected in spring. 

Growth  is  projected  to  ease  further  in  2018  to  2.1%. Private consumption is expected to 
decelerate  further,  despite  declining  but  still  strong  job  creation,  as  residential  investment 
increases  and  households  start increasing their  level  of  precautionary  savings.  Investment  is 
expected  to  increase  slightly  with  dwellings  being  its  most  dynamic  component,  and  the 
contribution  of  the  external  sector  becomes  positive,  mainly  due  to  the  deceleration  of 
imports. Inflation is projected to remain just slightly beyond its level in 2016, at 1.4%, as a 
stronger  euro  more  than  offsets  rising  oil  prices.  Nominal  growth  is  projected  to  reach  3.6, 
same as in 2017. 
As  Spain  enters  its  3rd  year  of  expansion  in  2016,  the  output  gap  is  projected  to  start 
gradually  closing.  It  is  forecast  to  reach  a  value  of  -1.7%  and  -0.2%  of  GDP  in  2016  and 
2017, respectively, and eventually turn positive in 2018, when it is expected to reach 0.9% of 
GDP.  

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There  are,  however,  downside  risks  to  the  growth  forecast,  especially  as  from  2017, 
related  among  others,  to  the  outcome  of  the  referendum  in  the  United  Kingdom  on  the 
membership of the European Union, which has increased uncertainty, with potential negative 
implications for trade and domestic demand. 

Table 1: recent macroeconomic developments and outlook 

3.  RECENT BUDGETARY DEVELOPMENTS AND OUTLOOK FOR 2016-2018  

On the fiscal side, the updated Commission 2016 spring forecast factors in the latest budget 
execution data, which refers to the first-quarter (for the general government), to the first four 
months of the year (for the central, regional and social security government subsectors) and 
until May regarding the Estado, which is part of central government.4  

The  updated  spring  forecast  projects  the  general  government  deficit  to  continue  to 
narrow  and  to  reach  4.6%  of  GDP  in  2016.  This  is  0.7  pp  of  GDP  higher  than  in  the 
Commission  2016  spring  forecast,  with  differences  stemming  mostly  from  a  downward 
revision of expected income tax revenues. The latter owes partly to a more negative valuation 
of the effects of the personal income tax reform, but is mainly explained by changes made to 
the 
instalment  payments  (pagos 
fraccionados),  in  force  since  January  2016.  These  are  expected  to  lead  to  a  reduction  of 
corporate taxes paid throughout the year, which would be compensated by higher payments in 
the final tax settlement to be made in the following year. This measure amounts to EUR 6 bn 
(0.5%  of  GDP)  in  the  updated  spring  forecast  and  qualifies  as  a  one-off  according  to  the 

legal  framework  governing  corporate 

income 

tax 

4

See 

http://www.igae.pap.minhap.gob.es/sitios/igae/es-

ES/ContabilidadNacional/infadmPublicas/Paginas/administracionespublicas.aspx  

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2018Spring forecastUpdated spring forecastSpring forecastUpdated spring forecastUpdated spring forecastReal GDP (% change)3,22,62,92,52,32,1Private consumption (% change)3,13,03,32,32,31,3Gross fixed capital formation (% change)6,44,73,65,04,04,2Exports of goods and services (% change)5,44,52,85,24,64,2Imports of goods and services (% change)7,55,84,35,85,43,9Contributions to real GDP growth:- Final domestic demand3,62,93,02,62,31,9- Change in inventories0,10,00,20,00,00,0- Net exports-0,5-0,3-0,4-0,10,00,2Output gap1-4,0-1,5-1,70,3-0,20,9Employment (% change)2,92,52,62,22,21,7Unemployment rate (%)22,120,019,918,118,116,6Labour productivity (% change)0,20,10,30,50,30,4HICP inflation (%)-0,6-0,1-0,31,41,51,4GDP deflator (% change)0,60,90,51,41,31,5Comp. of employees (per head, % change)0,50,81,01,01,11,6Net lending/borrowing vis-à-vis the rest of the world (% of GDP)2,12,32,32,12,02,0Source:Updated Commission 2016 spring forecast (COM).201520162017Note:1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology. 
                                                 
Commission.5 It therefore leads to a worsening of revenues in 2016 but to an improvement by 
the same amount in 2017.  

The reduction of the deficit in 2016 relative to 2015 continues to rely to a large extent on 
the positive macroeconomic outlook, which supports tax revenues and keeps social transfers 
in check. Moreover, previous improvements in financing conditions and the stabilising public 
debt ratio imply that interest expenditure is likely to continue to fall. As in the spring forecast, 
the  projected  improvement  in  the  deficit  for  2016  is  also  the  result  of  saving  measures  at 
central and regional government level put in place by the caretaker government in response to 
the  Commission  Recommendation  of  March  2016.  The  2016  Stability  Programme  targeted 
savings from the new measures at central and regional level in the amount of around 0.4% of 
GDP,  including  cuts  in  budgetary  appropriations  (EUR  3.5  billion)  and  savings  from  the 
implementation at regional level of a new expenditure rule on pharmaceutical and healthcare 
spending (EUR 420 million). Based on the available information on the response of regional 
governments  to  the  Ministry  of  Finance's  call  for  spending  cuts  (through  acuerdos  de  no 
disponibilidad)  and  the  degree  of  adherence  to  the  new  healthcare  and  pharmaceutical 
spending rule, the updated Commission  2016 spring forecast  incorporates a deficit-reducing 
impact of about 0.2% of GDP from these savings mostly driven by the central government, 
which are not expected to remain in place in 2017. This is around 0.1% of GDP lower than in 
spring.  

The updated Commission 2016 spring forecast  projects the  general government  deficit 
to narrow further to 3.3% of GDP in 2017. It is also 0.2% of GDP higher than in the spring 
forecast,  reflecting  the  worse-than-expected  starting  position  and  the  fact  that  the  savings 
measures  taken  in  response  to  the  March  2016  Commission  Recommendation  are  not 
considered to be rolled over to next year. The improvement of the deficit relative to 2016 is 
again  mainly  due  to  the  cyclical recovery  and  the  continued  decline  in  interest  expenditure. 
Together  with  the  impact  of  the  2013  local  administration  reform  and  the  fact  that  the 
repayment  of  the  foregone  2012  Christmas  bonus  is  fading  out,  expenditure  growth  is 
expected to be reined in.  

The updated Commission 2016 spring forecast  projects the  general government  deficit 
to narrow further to 2.7% of GDP in 2018. The improvement of the deficit relative to 2017 
is again mainly due to the cyclical recovery and the continued decline in interest expenditure 
and the fact that social transfers continue to grow at a slower pace than nominal GDP. 

In its reasoned request of 13 July, the Spanish government announced its commitment 
to put in place further deficit-reducing measures. On the revenue side, amendments to the 
corporate income tax law, to be adopted as soon as a new government is formed, would allow 
making  up  for  the  loss  in  revenues  expected  for  2016  following  the  changes  made  to  the 
regulation of instalment payments (pagos fraccionados) of the corporate income tax, so as to 
ensure  that  corporate  income  tax  revenues  in  2016  reach  the  level  expected  in  the  2016 
Stability Programme. On the expenditure side, the advancement of the date of closure of the 
central  government's  fiscal  year,  adopted  on  14  July,  can  help  contain  expenditure 
developments  in  the  second  half  of  2016. 6 The  updated  spring  forecast  does  not  include 
savings from these measures, due to uncertainties surrounding their final specification (in the 
former) and their estimated impact (in the latter). These measures are subject to considerable 
implementation  risks,  in  particular  with  respect  to  the  timely  adoption  by  Parliament  of 

5 The reduction in corporate income tax instalment payments in 2016 create a permanent delay in the payment of 
taxes, but do not change in the tax rate or tax base, so in a new steady state (starting in 2017) they would not 
affect revenue from corporate income taxes.  

6 See Ministerial Decision HAP/1169/2016, of 14 July at https://www.boe.es/boe/dias/2016/07/16/pdfs/BOE-A-

2016-6843.pdf  

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required changes to the corporate income tax law and whether they will be sufficient to offset 
the expected temporary shortfall in corporate income tax revenues in 2016.  

Lastly, according to the updated Commission 2016 spring forecast, the debt ratio is expected 
to peak at 100.6% of GDP in 2017 before retreating marginally in 2018, thus exceeding the 
Treaty reference value in all years.  

Table 2: Composition of budgetary adjustment 

4. 

PROPOSED NEW FISCAL ADJUSTMENT PATH 

Table  3  summarises  the  main  elements  from  the  updated  Commission  2016  spring  forecast 
that underpin the new adjustment path.  

Table 3: Forecast of key macroeconomic and budgetary variables under the baseline 
scenario 

The  proposed  deadline  for  correcting  the  excessive  deficit  situation  notably  takes  into 
account  the  economic  conditions  together  with  other  relevant  factors.  Based  on  the 
baseline  scenario  outlined  above,  the  second-round  effects  of  the  additional  consolidation 
efforts required to bring an end to the excessive deficit situation are assessed. Moreover, the 
design  of  the  new  adjustment  path  for  Spain  takes  account  of  the  fact  that  the  Council 
decision  to  give  notice  is  adopted  in  the  second  half  of  the  year,  which  amplifies  the  fiscal 
effort it would take to achieve a given annual improvement of the structural balance. Finally, 
the baseline scenario for the new adjustment path starts with a deterioration of 0.4% of GDP 
of the structural deficit in 2016, which is at least in part the result of the inflation turning out 

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20152018OutturnSpring forecastUpdated spring forecastSpring forecastUpdated spring forecastUpdated spring forecastRevenue38,238,237,538,338,238,2of which:- Taxes on production and imports11,711,911,912,011,911,9- Current taxes on income, wealth, etc.10,19,99,210,19,910,1- Social contributions12,212,212,212,112,112,0- Other (residual)4,24,14,14,24,2Expenditure43,342,142,141,341,540,9of which:- Primary expenditure40,339,239,338,738,938,4of which:Compensation of employees11,010,710,810,310,510,4Intermediate consumption5,24,94,95,15,04,9Social payments18,418,018,017,617,717,5Subsidies1,21,11,11,11,11,1Gross fixed capital formation2,52,32,22,32,32,3Other (residual)2,12,32,32,22,32,3- Interest expenditure3,12,92,82,72,62,5General government balance (GGB)-5,1-3,9-4,6-3,1-3,3-2,7Primary balance-2,0-1,1-1,8-0,4-0,7-0,2One-off and other temporary measures-0,20,0-0,60,00,00,0GGB excl. one-offs-4,9-3,9-4,0-3,1-3,3-2,7Output gap (*)-4,0-1,5-1,70,3-0,20,9Cyclically-adjusted balance-2,9-3,1-3,6-3,2-3,2-3,2Structural balance (SB)-2,7-3,1-3,1-3,2-3,2-3,2(% of GDP)20162017(*) % of potential GDPSource: Updated Commission 2016 spring forecast 2015201620172018Real GDP growth %3,2%2,9%2,3%2,1%Output gap %-4,0%-1,7%-0,2%0,9%General government balance%GDP-5,1%-4,6%-3,3%-2,7%Structural balance %GDP-2,7%-3,1%-3,2%-3,2%Change in structural balancepps-0,9%-0,4%-0,1%0,0%Source: Updated Commission 2016 spring forecast  
 
lower than projected in the scenario underpinning the 2016 budget – an event that is largely 
outside the control of the government. 

Against this background, it is proposed not to request additional consolidation measures 
in 2016. This leads to a headline target for 2016 of 4.6% of GDP, as in the baseline scenario. 
It  implies  a  0.4%  of  GDP  deterioration  of  the  structural  balance,  also  as  in  the  baseline 
scenario.  

An extension of the deadline by two years could be considered appropriate. Considering 
that no further structural measures should be requested in 2016, granting Spain one additional 
year  for  the  correction  of  its  excessive  deficit,  which  is  the  rule  according  to  Council 
Regulation (EC) No 1467/97, would require an annual improvement of the structural balance 
in 2017 of 0.8% of GDP, requiring measures of 0.9% of GDP. Therefore, it seems adequate to 
extend the deadline for Spain to bring an end to its excessive deficit situation by two years. 

In  2017,  in  view  of  the  strong  cyclical  tailwind,  the  benchmark  improvement  of  the 
structural balance of at least 0.5% of GDP would bring the general government deficit 
to  3.1%  of  GDP.  This  requires  additional  measures  of  0.5%  of  GDP  compared  to  those 
already included in the updated Commission 2016 spring forecast.  

In 2018, a further improvement of the structural balance by 0.5% of GDP would bring 
the general government deficit to 2.2% of GDP. This requires additional measures of 0.5% 
of GDP compared to those already included in the updated Commission 2016 spring forecast. 
These  targets  ensure  a  sufficient  margin  towards  the  3%  reference  value,  enabling  Spain  to 
put an end to the situation of an excessive deficit in a durable manner.  

Extending  to  2017  the  0.4%  of  GDP  expenditure  savings  at  central  and  regional 
government level planned in the 2016 Stability Programme, could, if fully implemented, 
contribute  to  the  requested  effort  by  0.4%  of  GDP.7 These  savings  would  need  to  be 
complemented with other permanent measures, such as the reduction of the number and scope 
of  tax  expenditures,  in  particular  the  reduced  VAT  rates,  to  achieve  the  required  structural 
effort. Data show that there is scope for such policy action: the level of indirect taxation and 
the implicit rate on consumption in Spain remain among the lowest in the EU, at 11.6 % of 
GDP  and  15.2%  in  2014,  respectively.  Moreover,  in  2013  (latest  available  figure),  Spain 
recorded  the  largest  VAT8 policy  gap  in  the  EU  (at  53.9 %  compared  to  the  EU  average  of 
47.2 %).  

Table 4: Forecast of key macroeconomic and budgetary variables under the EDP 
scenario. 

7 To note that half of the 0.4% of GDP savings reported in the 2016 Stability Programme were already included 
in  the  updated  Commission  2016  spring  forecast.  However,  these  savings  were  not  projected  to  remain  in 
place in 2017. 

8 The VAT policy gap is an indicator of the VAT revenue theoretically foregone by applying non-standard rates 
to some goods and services, expressed as a share of revenues that would be collected if everything was taxed at 
the standard rate 

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2015201620172018Additional permanent measures% GDP0,0%0,5%0,5%Real GDP growth %3,2%2,9%1,7%1,5%Output gap %-4,0%-1,7%-0,8%-0,1%General government balance%GDP-5,1%-4,6%-3,1%-2,2%Structural balance %GDP-2,7%-3,1%-2,6%-2,1%Change in structural balancepps-0,9%-0,4%0,5%0,5%Source: Updated Commission 2016 spring forecast  
                                                 
5. 

Fiscal framework  

On 12 July  2016, in the context of the 2016 European Semester, the Council recommended 
Spain to implement at all government levels the tools set out in its fiscal framework law.  

Spain’s  fiscal  framework  does  include  relevant  tools  to  prevent  and  correct  deviations 
from  fiscal  targets.  For  example,  the  2012  Stability  Law  introduces  an  early-warning 
mechanism  so  that  early  corrective  action  can  be  taken  in  the  event  of  an  identified  risk  of 
non-compliance with deficit, public debt or spending rule targets. If no action is taken, the law 
foresees  corrective  and  enforcement  measures.  The  experience  of  the  past  few  years  shows 
that  these  tools  could  have  been  enforced  to  a  greater  extent,  especially  at  regional  level9. 
Following  the  March  2016  Commission  Recommendation,  the  Spanish  government  has 
enforced  some  of  the  corrective  provisions  in  the  Stability  Law10 that  have  so  far  not  been 
implemented,  such  as  the  requirement  for  non-compliant  regional  governments  to  adopt 
expenditure  cuts  in  budget  appropriations.  Looking  forward,  greater  automaticity  in  the 
application of the preventive and corrective mechanisms provided for in Spain's Stability Law 
at  all  government  levels  could  be  conducive  to  a  timely  and  durable  correction  of  Spain's 
excessive deficit.  

Spain’s  fiscal  framework  also  includes  tools  to  ensure  sustainable  expenditure 
developments.  Specifically,  it  includes  an  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 (set at 1.8% for 2016 by the Ministry 
of Economy). As the economy is growing above this rate, compliance with this rule can help 
underpin  consolidation  by,  among  other  things,  avoiding  that  windfalls  are  entirely  spent. 
Moreover, the contribution of the Stability Law's spending rule to the sustainability of public 
finances  could  be  enhanced  by  clarifying  the  coverage  and  definition  of  the  spending 
categories needed for its computation and, contrary to its implementation in 2016, explicitly 
calling on the non-compliant public administrations to make up for spending slippages in the 
year following their occurrence.  

The  2016  Country  Specific  Recommendations  also  call  on  Spain  to  enhance  control 
mechanisms  for  public  procurement  and  coordination  of  procurement  policies  across 
government  levels.  This  is  against  the  backdrop  of  a  relatively  high  number  of  presumed 
breaches  of  EU  public  procurement  legislation  brought  to  the  Commission’s  attention  in 
recent  years.  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. Spain stands out for a low publication rate of contract notices compared with other 
Member  States.  They  represented  1.8  %  of  GDP  in  2014,  compared  with  4.4  %  in  the  EU, 
which  ranks  Spain  23rd  out  of  28  countries.  Similarly,  the  publication  rate  in  terms  of 
percentage of total expenditure on procurement is only 13.2% compared to an EU average of 
26.2%, Spain ranking 22 out of 28 countries. Spain also stands out for a relatively high use of 
the negotiated procedure without prior publication (10 % of all award notices vs. 5 % in the 
European  Economic  Area,  ranking  22  out  of  31  countries).  This  translates  into  limited 
competition  from  undertakings  from  other  EU  countries  and  frequently,  into  direct  awards, 
with  implications  in  terms  of  higher  general  government  expenditure.  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 

9 See  section  3.5.  on  Public  Administration,  Fiscal  Frameworks  and  Taxation  of  the  2016  Country  Report  for 
Spain at http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_spain_en.pdf    
10 E.g., Art. 25.1a) of Spain's Stability Law.  

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legal  compliance  in  public  procurement  throughout  the  country  hampers  the  proper 
implementation of procurement rules and may create opportunities for wrongdoings, both of 
which have negative impacts on the situation of Spain's public finances. 

6. 

CONCLUSIONS  

On  12  July  2016,  in  compliance  with  Article  126(8)  TFEU  and  following  a  Commission 
reccomendation, the Council issued a decision establishing that no effective action had been 
taken  by  Spain  in  response  to  the  2013  Council  recommendation.  Hence,  as  prescribed  by 
Article  126(9),  the  Council  upon  Commission  reccomendation,  shall  give  notice  to  the 
country to correct its excessive deficit, indicating the adjustment path. 

On the basis of the updated Commission 2016 spring forecast, and taking into account that the 
Council decision to give notice is adopted in the second half of the year, which amplifies the 
fiscal effort it would take to achieve a given annual improvement of the structural balance, a 
correction  path  that  envisages  no  additional  measures  in  2016  and  0.5%  of  GDP  additional 
corrective measures in both 2016 and 2017, on top of those already included in the updated 
2016 spring forecast,  would appear justified.  This  would lead to  a headline deficit of 4.6%, 
3.1%  and  2.2%  of  GDP  in  2016,  2017  and  2018,  respectively  and  would  imply,  in  turn,  a 
deterioration  of  the  structural  adjustment  by  0.4%  of  GDP  in  2016  and  an  improvement  by 
0.5% of GDP both in 2017 and 2018. 

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Annex:  forecast  of  key  variables  for  the  computation  of  the  fiscal  effort  under  the 
baseline scenario  

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201620172018Structural expenditure (% of potential GDP)41.0841.3741.39Potential GDP growth (%)0.450.720.90Current revenue (national currency)411.13434.88450.87Discretionary measures wih impact on current  revenue (national currency)-8.045.530.19Nominal GDP growth (%)3.403.633.56p.m Output gap (% of Pot. Output)-1.73-0.230.92Discretionary measures wih impact on total  revenue net of one-offs and other temporary measures (national currency)-2.755.520.19Total expenditure net of one-offs and other temporary measures  (national currency)469.48480.62490.70Interest expenditure (national currency)31.4730.5229.61Total unemployment4542.964136.803765.64Source: Commission calculations based on updated spring 2016 forecastEnters top-downαβEnters bottom-up