Government to set limits on public debt

The Spanish government has reached an agreement with the main opposition party, the Popular Party, to set constitutional limits on the public deficit without including specific deficit ceiling figures. The reform will be accompanied by legislation which will put a ceiling on the structural deficit – the fiscal gap during a normal economic cycle – of 0.4 per cent of the gross domestic product (GDP). However, although it will be enacted in 2012, the law will not come into force until 2020.

Causes of the reform

The national debt crisis, which has been affecting the Spanish economy since 2009, worsened in August last. On 5 August, the Spanish risk premium (the spread between the interest offered on 10-year Spanish bonds and 10-year German bonds over the same period) reached its highest level in history, at 421 points. That is, the annual interest on the country’s 10-year bond was 6.47%, 4.21% higher than German bonds. The European Central Bank bought Spanish sovereign bonds in an attempt to lower the risk premium. Furthermore, on 19 August, the government enacted a Royal Decree, containing more measures to decrease the public deficit. These included greater use of cheaper generic drugs by the health service, and arranging for advance taxation of enterprises with a turnover of more than €20 million. The Spanish Prime Minister, José Luis Rodríguez Zapatero, fearing a new national debt crisis in the autumn has also proposed that a constitutional limit should be set on the public deficit. His view is that this would be the least painful measure in order to ease the tension in the financial markets.

Agreement on constitutional limits to public deficit

After some days of negotiations, the government and the Popular Party (PP) agreed to set a constitutional limit on the public deficit without including specific deficit cap figures.

The Spanish Parliament enacted the reform of Article 135, on 2 September 2011, which has several important points.

• Every public administration has to adjust its performance to the principle of budget stability.

• Structural deficits of both State and Autonomous Communities cannot exceed figures fixed by the EU.

• Public debt, with regard to GDP, cannot exceed the figure established in the Treaty on the Functioning of the European Union.

• Structural deficit limits and the volume of the public debt can be increased only in the case of natural disaster, economic recession or an emergency recognised by an absolute majority of the Spanish parliament.

• A new fundamental law will fix the budget deficit limits.

Law to be enacted in 2012

The constitutional reform will be completed with a fundamental law which will set a ceiling on the structural deficit – the fiscal gap over the course of a normal economic cycle – at 0.4% of GDP: 0.26% for the Central Administration, 0.14% in the case of the autonomous communities and 0% for local authorities. It is expected that the law will be enacted by 30 June 2012. However, it will not come into force until 2020.

Objections to the reform

Due to objections to the reform raised by left-wing and nationalist parties, the government excluded these political parties from the debate on the reform, breaking the so-called ‘constitutional deal’. Only during the last parliamentary debate were some efforts made to persuade the Catalan nationalist party, Convergence and Union, (CIU), to support the reform, which failed. Nationalist parties oppose the measure arguing that they will only support a constitutional reform if it gives Autonomous Communities more opportunities for self-government. Left-wing parties, together with the trade unions, say the measure will encourage neo liberal policies and will cut social expenditure. They also say such an important reform should be put to a referendum. Demonstrations against the reform were called for by the unions on 7 September in several cities. The social movement ‘indignados’ also called for a demonstration in Madrid.

Pablo Sanz de Miguel. CIREM Foundation