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, public debt, public expenditure, public finance, stability pact

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   EUROPEAN COMMISSION  Brussels, 27.7.2016  COM(2016) 518 final   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 {SWD(2016) 263 final}  
 
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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(9) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU), Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth  conducive  to  employment  creation.  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. 

On  27  April  2009,  the  Council  decided,  in  accordance  with  Article  104(6)  of  the 
Treaty establishing the European Community (TEC) that an excessive deficit existed 
in Spain and issued a recommendation to correct the excessive deficit by 2012 at the 
latest,  in  accordance  with  Article  104(7)  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) TFEU, 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)  According to the provisions of Article 126(8) of the Treaty, the Council decided on 12 
July  2016  that  Spain  did  not  take  effective  action  in  response  to  the  Council 
Recommendation of 21 June 2013. 

(5) 

1 
2 

According to Article 10(2) of Regulation (EC) No 1467/97, if action by a participating 
Member  State  is  not  being  implemented  or,  in  the  Council's  view,  is  proving  to  be 
inadequate, the Council shall immediately take a decision under Article 126(9) of the 
Treaty.  

OJ L 209, 2.8.1997, p. 6. 
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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(6) 

(7) 

The Commission has updated its 2016 spring forecast with information available until 
19 July 2016. On this basis, the real GDP growth forecast for  2016 has been revised 
upwards  by 0.3 percentage  points in comparison to the  spring forecast, to 2.9%, and 
downwards for 2017 (2.3% vs. 2.5% in spring). For 2018, real GDP is forecast to grow 
by 2.1%. This compares to growth of 3.2% in 2015. Economic growth is therefore set 
to ease but to remain robust, still benefitting from reforms undertaken in response to 
the  crisis  and  the  successful  completion  of  the  financial  assistance  programme.  The 
recovery continues to be accompanied by strong job creation, in a context of continued 
wage moderation and benefitting from the labour market reforms. Low oil prices also 
support  growth.  At  the  same  time,  inflation  is  expected  to  be  −0.3%  in  2016.  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. 

According  to  the  updated  Commission  2016  spring  forecast,  the  general  government 
deficit is expected to narrow to 4.6% of GDP in 2016, 3.3% of GDP in 2017 and 2.7% 
of GDP in 2018 (compared to Stability Programme targets of 3.6%, 2.9% and 2.2% of 
GDP in 2016, 2017 and 2018, respectively and a projected deficit outcome of 3.9% of 
GDP  in  2016  and  3.1%  of  GDP  in  2017  in  the  spring  forecast).  The  higher  deficit 
forecast is due partly to the fact that the updated Commission forecast takes on board a 
lower amount of measures to contain expenditure at central and regional government 
level  in  response  to  the  March  2016  Commission  Recommendation  (0.2%  of  GDP) 
than the Stability Programme forecast (0.4% of GDP) on account that some of these 
measures  have  not  yet  been  sufficiently  specified  to  be  included  in  the  Commission 
forecast on the basis of the usual no-policy-change assumption. However, most of the 
difference  stems  from  changes  made  to  the  corporate  income  tax  legal  framework, 
leading  to  lower  advanced  payments  by  companies  ('pagos  fraccionados')  in  2016. 
The shortfalls  in  advanced payments  were  not quantified in the Stability Programme 
and only became apparent in April, at the time of the first instalment, after the cut-off 
date  of  the  spring  forecast.  The  updated  Commission  2016  spring  forecast  estimates 
these  shortfalls  at  0.5%  of  GDP  in  2016.  As  the  abovementioned  changes  create  a 
permanent  delay  in  the  payment  of  taxes,  but  not  to  a  change  in  the  tax  rate  or  tax 
base, they would not affect revenue from corporate income taxes in a new steady state 
(starting in 2017). They result in a temporary loss of tax collection in 2016, which has 
been  treated  as  a  one-off  in  the  updated  spring  forecast.  For  2017,  the  differences 
between  the  updated  spring  forecast  and  the  Stability  Programme  stem  from  the 
worse-than-expected starting position and the fact that the savings measures taken in 
response  to  the  March  2016  Commission  Recommendation  are  not  yet  sufficiently 
specified  to  be  taken  into  account  on  the  basis  of  the  usual  no-policy-change 
assumption. The structural deficit is expected to increase by 0.4% and 0.1% of GDP in 
2016 and 2017, respectively, and to remain unchanged in 2018. However, in 2016, the 
projected increase of the structural deficit is partly driven by the fact that the current 
outlook for inflation and nominal GDP growth is lower than the one underpinning the 
2016  budget,  which  adversely  affected  structural  government  revenue  while  not 
allowing to adjust expenditure. 

(8) 

The general government gross debt-to-GDP ratio rose from 36% in 2007 to about 99% 
in 2014. In 2015, the debt ratio was more or less stable, as net sales of financial assets 
offset  the  negative  impact  of  the  deficit  growing  faster  than  nominal  GDP  growth. 
According to the updated Commission 2016 spring forecast, the debt ratio is expected 
to peak at 100.6% of GDP in 2017, whereas the spring forecast projected the debt to 

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(9) 

peak at 100.3% of GDP in 2016. Although Spain does not appear to face immediate 
risks  of  fiscal  stress  arising  from  this  high  debt  ratio,  debt-sustainability  risks  will 
significantly increase in the medium term if the budgetary position is not improved. In 
the longer term, risks to fiscal sustainability are set to be reduced thanks to the positive 
impact of reductions in age-related expenditure3. 

According to Article 5 of Regulation (EC) No 1467/97, in the Council decision to give 
notice to take measures for the deficit reduction in accordance with Article 126(9) of 
the Treaty, the Council shall request that the Member State achieve annual budgetary 
targets which, on the basis of the forecast underpinning the notice, are consistent with 
a  minimum  annual  improvement  of  at  least  0.5%  of  GDP  as  a  benchmark,  in  its 
cyclically adjusted balance net of one-off and temporary measures. However, the fact 
that  this  Council  decision  to  give  notice  is  adopted  in  the  second  half  of  the  year 
amplifies  the  fiscal  effort  needed  to  achieve  a  given  annual  improvement  of  the 
structural balance. It is also important to bear in mind that the baseline scenario for the 
new  adjustment  path  starts  with  a  deterioration  of  0.4%  of  GDP  of  the  structural 
deficit,  which  is  at  least  in  part  the  result  of  the  inflation  turning  out  lower  than 
projected  in  the  scenario  underpinning  the  2016  budget  –  an  event  that  is  largely 
outside the control of the government. Taking this into account, it appears appropriate 
not to request further structural measures in 2016. 

(10)  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  which  would  have  a  too  negative 
impact  on  growth.  Therefore,  it  seems  adequate  to  extend  the  deadline  for  Spain  to 
bring an end to its excessive deficit situation by two years. 

(11)  Therefore, a credible and sustainable adjustment path would require Spain to reach a 
general government deficit of 4.6%, 3.1% and 2.2% of GDP in 2016, 2017 and 2018, 
respectively, which is consistent with a deterioration of the structural balance of 0.4% 
of  GDP  in  2016  and  a  0.5%  of  GDP  improvement  in  both  2017  and  2018.  These 
budgetary  targets  also  take  into  account  the  need  to  compensate  for  second-round 
effects  of  fiscal  consolidation  on  public  finances,  through  its  impact  on  the  wider 
economy.  

(12) 

(13) 

In order to reach those targets, further structural measures with an estimated impact of 
0.5% of GDP in both 2017 and 2018, are considered necessary. Savings for 2017 and 
2018  could  among  others  include  the  reduction  of  the  number  and  scope  of  tax 
expenditures,  in  particular  the  reduced  VAT  rates,  in  order  to  achieve  the  required 
structural effort.  

In  addition,  strict  enforcement  at  all  government  levels  of  the  preventive  and 
corrective mechanisms provided for in Spain's Stability Law could be conducive to a 
timely and durable correction of the excessive deficit. This could be achieved through 
greater  automaticity  in  their  implementation.  Moreover,  the  contribution  of  the 
Stability Law's spending rule to the sustainability of public finances could be enhanced 
by further clarifying the coverage and definition of the spending categories needed for 
its computation and by explicitly calling on the non-compliant public administrations 
to make up for spending slippages in the year following their occurrence.  

3 

European  Commission  (2016),  "Fiscal  Sustainability  Report  2015",  European  Economy,  Institutional 
Paper No. 018. 

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(14)  Spain  should  also  pay  due  attention  to  the  qualitative  aspects  of  public  finances, 
including its public procurement policy. The number of wrongdoings having an impact 
on the application of EU public procurement legislation brought to the Commission’s 
attention in recent years has been significant. The data show 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  and  a  relatively  high  use  of  the  negotiated 
procedure  without  prior  publication  compared  with  other  Member  States.  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 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. 

(15)  To facilitate the success of the fiscal consolidation strategy, it will also be important to 
back  the  fiscal  consolidation  by  comprehensive  structural  reforms,  in  line  with  the 
Council  recommendations  addressed  to  Spain  in  the  context  of  the  2016  European 
Semester  and  in  particular  those  related  to  the  correction  of  its  macroeconomic 
imbalances. 

(16)  According to Article 126(9) of the Treaty, the Council may, as part of its  decision to 
give notice under this Article, request the Member State concerned to submit reports 
on the adjustment effort in accordance with a specific timetable. According to Article 
5(1a)  of  Regulation  (EC)  No.  1467/97,  the  Member  State  report  shall  include  the 
targets for government expenditure and revenue and specify the fiscal policy measures 
on  both  the  expenditure  and  the  revenue  side,  as  well  as  information  on  the  policy 
actions being taken in response to the specific Council decisions. In order to facilitate 
the monitoring of the deadline for compliance with the recommendations contained in 
this  notice,  as  well  as  the  deadline  for  correction  of  the  excessive  deficit,  Spain  is 
requested to submit such a report by 15 October 2016, in parallel with its 2017 Draft 
Budgetary Plan.  

(17)  Spain  should  also  report  to  the  Commission  and  the  Economic  and  Financial 
Committee as required under Article 10 of Council Regulation (EU) No 473/2013 in 
accordance  with  the  specifications  laid  down  in  Commission  Delegated  Regulation 
(EU)  No  877/2013.  The  report  should  be  submitted  for  the  first  time  by  15  January 
2017 and on a three-monthly basis thereafter. 

HAS ADOPTED THIS DECISION: 

Article 1 

1. 

2. 

Spain shall put an end to the present excessive deficit situation by 2018. 

Spain shall reduce the general government deficit to 4.6% of GDP in 2016, to 3.1% 
of  GDP  in  2017  and  to  2.2%  of  GDP  in  2018.  This  improvement  in  the  general 
government  deficit  is  consistent  with  a  deterioration  of  the  structural  balance  by 
0.4%  of  GDP  in  2016  and  a  0.5%  of  GDP  improvement  in  both  2017  and  2018, 

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3. 

4. 

5. 

6. 

based  on  the  updated  Commission  2016  spring  forecast.  Spain  shall  also  use  all 
windfall gains to accerelate the deficit and debt reduction.  

In addition to the savings already included in the  updated Commission 2016 spring 
forecast,  Spain  shall  adopt  and  fully  implement  consolidation  measures  for  the 
amount of 0.5% of GDP in both 2017 and 2018.  

Spain shall stand ready to adopt further measures should risks to the budgetary plans 
materialise. Fiscal consolidation measures shall secure a lasting improvement in the 
general government structural balance in a growth-friendly manner. 

Spain  shall  adopt  measures  to  strengthen  its  fiscal  framework,  in  particular  with  a 
view to increasing the automaticity of mechanisms to prevent and correct deviations 
from the deficit, debt and expenditure targets and to strengthening the contribution of 
the Stability Law's spending rule to public finance sustainability.  

Spain shall set up a consistent framework to ensure transparency and coordination of 
public procurement policy across all contracting authorities and entities with a view 
to  guaranteeing  economic  efficiency  and  a  high  level  of  competition.  Such 
framework  shall  include  appropriate  ex-ante  and  ex-post  control  mechanisms  for 
public procurement to ensure efficiency and legal compliance.  

Article 2 

The  Council  establishes  the  deadline  of  15  October  2016  for  Spain  to  take  effective  action 
and, in accordance with Article 5(1a) of Regulation (EC) No 1467/97, to  submit a report to 
the Council and the Commission on action taken in response to the Council notice. The report 
shall include the targets for government expenditure and revenue and specify the discretionary 
measures on both the expenditure and the revenue side, as well as information on the actions 
being  taken  in  response  to  the  specific  Council  recommendations  to  strengthen  its  fiscal 
framework and its public procurement policy framework in accordance with paragraphs 5 and 
6 of Article 1.  

This Decision is addressed to the Kingdom of Spain. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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