MADRID (Dow Jones)--The Spanish government Friday said its budget deficit was a higher-than-expected 11.4% of gross domestic product in 2009, as it announced a new plan to shore up its accounts in the short and long term.
"It's a plan that is essential after our most recent deficit figures," Finance Minister Elena Salgado said at a meeting with journalists after the government's weekly cabinet meeting. Spain had forecast a 2009 budget deficit of 9.5% of GDP.
European Union rules require member states to keep their deficits within 3% of GDP. The European Commission, the EU's executive arm, has given Spain until 2013 to meet that target, and the government of Socialist Prime Minister Jose Luis Rodriguez Zapatero has promised to do so.
At the same time, investors' concern over Spain, along with the other euro-zone countries considered to be most weakened by the global economic crisis, has been mounting since Greece admitted late last year that its budget deficit was much bigger than previously thought.
Spain is grappling with the collapse of a decade-long housing boom that has pitched the wider economy into a deep recession, sent tax revenues plummeting and social welfare costs soaring.
Furthermore, in the aftermath of the housing bust, the government doesn't expect the economy to return to pre-crisis growth rates anytime soon, making it impossible to meet spending commitments taken on during the boom years.
In order to bring its deficit down to 3% of GDP in 2013, the government said Friday it will seek a broad consensus with Spain's powerful regional and municipal governments to take revenue-raising and spending reduction measures worth around EUR50 billion, or 5.7% of GDP, through the year 2013.
The central government will shoulder the bulk of the adjustment, with measures worth around EUR40 billion, or 5.2% of GDP.
Some of the measures, such as a tax increase equivalent to 1% of GDP, were included in the government's 2010 budget plan. But most are new and include measures such as commitments to replace just 10% of departing public-sector employees and to reduce capital expenditures by 0.5% of GDP.
With an eye on the longer-term sustainability of its finances, the government also revealed a proposal to raise Spain's mandatory retirement age to 67 from 65.
The government confirmed its forecasts of a GDP contraction of 0.3% in 2010 and growth of 1.8% in 2011. It raised its 2012 forecast slightly to 2.9% growth from 2.7% growth and gave a new forecast of 3.1% growth in 2013.
Ben May, economist at Capital Economics, said there are risks that the government won't be able to carry out the deficit reduction plans because they are "heavily reliant on a strong recovery of the economy". He also highlighted the government's substantial 2009 deficit overrun.
-By Jonathan House, Dow Jones Newswires; +34 91 395 8120; jonathan.house@dowjones.com
(Daniel de la Puente contributed to this report)
Source: Wall Street Journal