Economy Minister clarifies constitutional amendment on budget deficits

Spanish Economy Minister Elena Salgado said Wednesday that the rules for ensuring fiscal discipline the government plans to include in the Constitution will be based on those already enshrined in the Law on Budget Stability.

In an interview with radio station Cadena Ser Salgado said the emphasis will be on eliminating a structural deficit as opposed to a cyclical deficit that reflects a downturn in the economic cycle.

"Our Budget Stability Law states that in the case of normal growth of between two and three percent - the norm in the years prior to the crisis - that the deficit has to be zero," she said. "If growth is more than 3 percent than the budget has to show a surplus, and if growth is slightly below 2 percent a small deficit is allowed. The same idea will be included in the Constitution."

Salgado said these rules needed to be included in the Constitution now as a result of the crisis and lack of confidence this has generated. "It provides tranquility for investors given that we issue long-term debt and they need to know that the requisites of budget stability are included in the highest level of our legislation," the minister said.

Prime Minister José Luis Rodríguez announced the proposed constitutional incarnation of financial propriety in Congress on Tuesday. The leader of the main Popular Party opposition group, Mariano Rajoy welcomed the move, which the government wants to see passed next month without the need for a referendum.

Salgado rejected Rajoy's claims to authorship of the idea. Rajoy, she said, at no point made reference to a structural deficit, which is key in making the proposal flexible during times of difficulty.

Salgado said the constitutional amendment will also address the need to put a cap on public debt, which in the case of Spain is below that of other European Union countries such as Italy and currently only about 14 points above the EU ceiling of 60 percent of GDP. By contrast, private debt is much higher. "We have to avoid that what happened to private debt happens with public debt. We are better off than our European partners, but it could become a serious problem."

Salgado said the constitutional amendment is not expected to kick in until 2018 when Spain forecasts it will have returned to a situation of structural equilibrium. Spain reduced its public deficit from 11.1 percent of GDP in 2009 to 9.2 percent last year. The government is aiming to trim the shortfall to six percent this year before bringing it back within the EU ceiling of 3 percent of GDP in 2013. Analysts welcomed the proposal to incorporate rules for guaranteeing financial hygiene in the Constitution.

"The news is obviously good, as it will shore up Spain's credibility in markets," Spanish brokerage Banesto Bolsa said in a note to clients. "However, we will have to wait to gauge its full impact; i.e. how the regional governments - the main drag on curbing the deficit - are affected."

Taxing the rich

Separately, Salgado said there are no plans to introduce a new tax for the super-rich, but hinted that measures that increase the fiscal burden on the well-off could be unveiled later this week.

"If you allow me, let's wait until Friday," she said, adding that many top businessmen are aware of the need to make a bigger contribution to the state's coffers in times of crisis.

It emerged earlier this week that the government is considering the reintroduction of a wealth tax that was abolished in April 2008.

Salgado has gone on record as saying that if the government had been aware of the full extent of the crisis that was about to hit the country, it may have thought twice about eliminating the tax, which brought in about two billion euros in 2007.

The Spanish economy shrank 0.9 percent in 2008 and 3.7 percent in 2009, and only managed to emerge from its worst recession in decades at the start of 2010.