Spain’s 2013 budget likely to include a 20% reduction in current expenditure, Barclays

Spain is set to announce today a series of economic reforms and a tighter budget for 2013, aimied at avoiding the need to request officially for an international bailout.

“We expect the government to remain committed to the agreed 4.5% GDP budget deficit target. However, we see the risk that it could be amended if Spain revises up its 2011 budget deficit figures to 10% of GDP from 8.9% of GDP, to include fund injections used to support the banking sector, which are estimated at €11bn,” said Fabio Fois, European economist at Barclays.

According to the bank, there is little political room for the Spanish government to implement additional primary balance adjustments on top of the one presented at the beginning of August of €50bn over the next 2.5 years.  

“The details of the budget will be presented over the weekend. However, we think that it is likely to include a 20% reduction in current expenditure in all ministerial departments, but is unlikely to take any decisive action on curbing pension spending,” Fois said.

The government is also supposed to present a set of structural reforms aimed at enhancing competition in the goods and services sectors to increase the overall domestic and external competitiveness of the economy.

In line with the ratification of the fiscal compact, Spain is likely to establish an independent budgetary authority. The mission of this court will be to review budgets and budget assumptions before the actual discussion in parliament.

“Overall, we continue to think that Spain will miss its budget deficit target for this year and next year as we see scope for fiscal slippages at the Regional Government level. Political tension between central government and the regions could also increase the likelihood of additional fiscal slippage because the chances that the government will use its powers to impose fiscal discipline are slimmer,” Barclays warned.

Meanwhile, consulting firm Oliver Wyman is due to reveal on Friday the recapitalisation requirements of 14 Spanish financial entities. According to the local press, the firm has broadened the capital shortfall of the Spanish banking sector. 

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