Spain's "Inverse Austerity" Leads To Multi-Year High Budget Deficit

For a country that laments the imposition of draconian "austerity" measures, now allegedly in their third year, which have so far seen government revenues slide, while spending rises, Spain sure has a problem with figuring out how it is supposed to work. Yet while the world was shocked back in December 2011 when Spain quietly announced its budget deficit would jump from 6% to 8.5%, before finally settling on 8.9% of GDP, today's announcement that the 2012 Spanish deficit was a whopping 10.2% of 2012 GDP hardly caused any commotion. Apologists will quickly say that this budget gap was boosted by the 3.2% increase due to setting up the bad bank, and rolling bank bailouts, and of course they will be right: just as all those economists were right to say that when one excludes all the negatives, US Q4 GDP was in fact positive. Or, indeed, as Goldman said to ignore this week's negative initial claims and new housing starts data: after all they too were negative. In fact, when one excludes all the negative trading days in 2013, the stock market has not had a down day yet. As for Spain, too bad the country can't have its broke bank cake and eat the budget surplus that would result "if only" things were different.

From Bloomberg:

Rescuing lenders including Bankia SA (BKIA) added 3.2 percentage points to the budget gap last year while rising unemployment and falling asset prices crimped government income, the commission said today. The deficit will narrow to 6.7 percent of gross domestic product this year before growing in 2014 to 7.2 percent -- more than twice its 2.8 percent target -- as temporary austerity measures expire.


European Union Economic and Monetary Affairs Commissioner Olli Rehn will comment on the economic outlook at a Brussels news conference starting at 11 a.m. as Spain lobbies for more time to reorder its finances. The nation has missed all its deficit targets since overspending surged to 11.2 percent of GDP in 2009 after the end of a decade-long property-fueled boom.


Spain escaped a full bailout last year after the European Central Bank pledged to backstop the single currency, causing the yield on its 10-year benchmark bond to drop about 250 basis points from a euro-era high of 7.75 percent in July.


The commission also said “the budgetary performance in 2012 was blighted by considerable shortfalls of both indirect and direct tax revenues.”


The commission raised its budget-deficit forecasts from November, when it saw shortfalls of 6 percent and 6.4 percent for 2013 and 2014. European officials left unchanged their view that the Spanish economy will contract by 1.4 percent this year and forecast a 0.8 percent expansion in 2014. Unemployment will rise to 27 percent this year from 25 percent in 2012 and remain at that level in 2014, the commission said.

Further confirming Spain's confusion vis-a-vis just what "austerity" is, and how it is supposed to work was the debt:

Spain’s debt load more than doubled to 88 percent of GDP last year compared with its pre-crisis level. It will surge to 101 percent next year, according to the commission.

Here's the thing: in austerity debt goes down, not up, so can we please stop attributing to austerity what simple political malfeasance, kickbacks and outright criminality will explain any day?

Finally, Europe's response - give it more time to do the opposite of what it is supposed to be doing:

In July, euro finance chiefs gave Spain an extra year to bring the shortfall back within the European limit of 3 percent of GDP. The plan was to achieve 6.3 percent in 2012, 4.5 percent this year before complying with the rules in 2014.

So to summarize: do more of what has failed to work for the past three years, in fact encourage Spain to do so, pretend the country is cutting its deficit when it is in fact balooning it, and avoid all structural reforms. Surely this will end well in a time when the banks are supposedly repaying the ECB's excess trillions in liquidity (if at a far lower pace than originally expected). And when the ECB's house of cards support beneath the European bond market fails next, everyone will again be absolutely shocked to find that things are worse than ever before.


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