Spain will revise down its economic growth forecast for 2013 next week and seek more time from the European Union to reduce its budget deficit as recession cuts deeper than previously expected, a government source told Reuters.
Spain's gross domestic product (GDP) will be forecast to shrink by 1 percent, rather than 0.5 percent, the source said, adding that the government intended to shift emphasis to growth rather than deficit reduction.
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Spain is negotiating with the European Commission for more time to bring its deficit within 3 percent of GDP, something it is currently expected to do by 2014, the source said.
Spain will increase its 2013 deficit target to 6 percent of GDP, from an existing forecast of 4.5 percent. The figures on growth and the deficit could still vary by one or two decimal points, depending on the outcome of talks with the Commission, the source said.
The Spanish government is now trying to balance control of state finances with more growth-oriented policies, the source said.
"We're looking into finding a middle way. In this respect, having some leeway on the deficit targets would be a good message to send to the markets."
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If the country is given one extra year, the deficit-cutting path will be 6 percent of GDP in 2013, 4.5 percent in 2014 and 3 percent in 2015, the source said, adding this was the most likely outcome of the negotiations.
If it is given two extra years, the deficit target for 2013 would then be slightly higher than 6 percent and the path would be significantly eased to reach the 3 percent target in 2016, the source explained.
Spain reported a deficit of 6.98 percent of GDP in 2012, excluding the cost of propping up its ailing banks, missing its EU-agreed target, of 6.3 percent, for the second year in a row.
Although the softer deficit targets might allow more room for pro-growth policies, the new goals will add pressure to Spain's already tough funding program for this year as the government will have to finance the higher budget gap.
Spain may still be over-estimating its growth potential as the Bank of Spain, the European Commission and the International Monetary Fund expect the economy to contract by around 1.5 percent this year.
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The source said the program of reforms for the next three years that Madrid will send to the Commission along with the new figures will invalidate those forecasts.
The document will include a renewed commitment to deepen the reform of the public pensions system, create an independent fiscal authority and take new steps on economic liberalization.
Madrid hopes these measures will boost activity and help the economy grow by 1 percent in 2014, the source said.