Spain to bust 2012 deficit target as economy slumps

Spain said Friday it would fall well short of its 2012 deficit target agreed with Brussels, blaming a slump and a soaring jobless rate which put it back at the centre of the eurozone debt crisis.

Missing the 2012 target for the public deficit -- the shortfall between spending and tax revenues -- raises the spectre of potential European Union sanctions.

Prime Minister Mariano Rajoy said his conservative government would aim to hold the public deficit in 2012 at 5.8 percent of gross domestic product, way above the previously agreed 4.4 percent.

The new deficit goal was “sensible,” he told a news conference in Brussels after a two-day European Union summit in which some eurozone partners said they expected Madrid to stick to its agreed targets.

The government, which took power in December after ousting the Socialists, came under even more pressure after the 2011 deficit hit 8.5 percent of GDP -- far above the 6.0-percent target agreed with Brussels.

In Madrid, Budget Minister Cristobal Montoro said he believed the European Union and investors would understand.

Asked in a news conference if Spain could face European sanctions over the predicted 2012 deficit blow-out, he said: “I am convinced that Brussels and all international investors will recognise the effort being made by the government and the Spanish people.” Ministers said the dramatically changed economic outlook -- Spain had expected the economy to grow 2.3 percent in 2012 when it agreed to the deficit-cutting target -- forced it to move the goalposts.

Even to meet the new level, the government said it would have to cut spending by a further 4.7 percent to 118.6 billion euros ($157 billion).

“This is a very bad year for the economy,” warned Economy Minister Luis de Guindos after a weekly cabinet meeting.

The government said it now expected the economy to shrink 1.7 percent in 2012, after growth of 0.7 percent in 2011.

Spain's average unemployment rate -- already the highest in the industrialised world at 22.85 percent at the end of 2011 -- would hit average 24.3 percent in 2012. “It is a completely unacceptable figure and this is the government's main incentive to implement the reforms,” De Guindos said.

Under labour market reforms approved by the government on February 11, maximum severance pay is slashed to 33 days' salary for each year worked from 45 days, going back 24 years at most.

It also makes it easier for companies to opt out of sector-wide or country-wide union collective wage agreements.

The government has made labour market reforms, along with steep spending cuts and a plan to clean up the country's banks, a cornerstone of its efforts to revive the economy.

The Spanish economy, the eurozone's fourth largest, shrank by 0.3 percent in the fourth quarter of 2011 and the government has warned that the drop will likely be steeper in the first quarter of this year.

The economy is still reeling from a 2008 housing bubble collapse, which destroyed millions of property-related jobs and was then compounded by the global financial and eurozone debt crises.