/ 28 August 2011

Spain’s parties sign deficit deal

Spain's Parties Sign Deficit Deal

Spain’s ruling and opposition parties bridged bitter rivalry and struck a deal on Friday to cap the long-term public deficit and fend off fears of a state debt crisis.

The ruling Socialist and conservative opposition Popular Party set a maximum structural or long-term deficit in the annual budget of 0.4% of gross domestic product (GDP) from 2020, a copy of the accord showed.

Only the broad principles of a balanced long-term budget are to be enshrined in the constitution while the 0.4% figure on the deficit limit will be introduced in an accompanying law.

The deal, the broad outlines of which were first announced two days earlier, was a surprise in Spain’s highly charged political climate ahead of November 20 general elections.

The Popular Party, which blames the Socialists for Spain’s economic ills including a jobless rate of more than 20%, is riding high in the opinion polls ahead of the vote.

Prime Minister Jose Luis Rodriguez Zapatero is not running in the elections, and his former deputy and interior minister Alfredo Perez Rubalcaba is the Socialists’ new standard bearer.

‘Need to get confidence back’
Rubalcaba said the deal was made more urgent by the turmoil of August when Standard & Poor’s stripped the United States of top AAA-rated credit rating, stock markets plunged and investors fled assets in Spain, Italy and even France.

“We had a bad August,” he told a news conference.

“The euro zone and its states’ sovereign debt have lost the confidence of the investment world. Today, Europe inspires less confidence than a month ago,” Rubalcaba said.

“We have to get that confidence back and we have to send clear messages to investors that we are a solvent country.”

Rubalcaba said the 2020 date for the reform sent an important message to buyers of Spain’s government debt, much of which is repayable over the longer term.

Under the deal, the Spanish state would be allowed a structural deficit of up to 0.26% of GDP and the 17 semi-autonomous regions a maximum shortfall of 0.14% of GDP.

Smaller, local governments would be required to show a balanced budget.

The structural deficit could be revised in 2015 and 2018 at the request of either of the political parties, according to the agreement, which they plan to approve by June 30 next year.

Budget swings
The deal, released on the Socialist Party’s website, covers only the structural or long-term deficit.

It does not try to prevent budget swings caused by the economic cycle, for example deficits incurred in times of recession because of falling tax income and higher spending on unemployment benefits.

Spain is seeking to slash the public deficit to 6.0% of GDP by the end of this year from 9.2% in 2010. It aims to reach the EU-target of 3.0% by 2013.

The new law also will set out criteria for trimming Spain’s total accumulated public debt, aiming to reach by 2020 the level agreed with the European Union.

Spain’s total public debt amounted to 63.6% of annual GDP at the end of March, surpassing the EU limit of 60% but still well below the bloc’s average of 80%.

Separately, government ministers Friday cleared a fresh package of labour market reforms aimed at fighting an unemployment rate running at more than 20%, and more than 45% for under 25s.

Among the reforms, temporary jobs will no longer be automatically converted into permanent jobs after two years, a measure that had led many employers to cut temporary workers before they joined the payroll for good.

The government also introduced a new type of job contract for youths aged 16-25 without qualifications, allowing them to spend 25% of their time in training. — AFP