Spain's budegt deficit

THE king of orthodoxy has crumbled. Faced with an inherited budget deficit that was way off target, Spain's Mariano Rajoy has rebelled against this year's European Union-agreed objective. Instead of bringing his country's deficit down to 4.4% of GDP, Mr Rajoy's centre-right People's Party (PP) government is aiming for a gentler 5.8%. It has taken little more than two months in government for Mr Rajoy to complete his transformation from gold-star pupil of Europe's austerity warriors to chief rebel. In that time Spain has begun to dip into a second recession. Unemployment has raced to 23% of the workforce and beyond, the highest figure in the EU. February saw a further 112,000 Spaniards added to the ranks of the jobless. The EU's deficit target assumed moderate economic growth this year. In fact, Spain's economy is set to shrink by 1.7%—with the consequent reduction in tax receipts and increase in social spending. The biggest shock of all, however, has been the state of the country's accounts. In the run-up to November's general election, the outgoing Socialist administration of José Luis Rodríguez Zapatero continued to insist that it was on track to meet the EU's 6% target. But last week Cristóbal Montoro, the budget minister, revealed the true figure: 8.5% (although some of Spain's fellow Europeans have their doubts about this number, as Charlemagne reports). This seemed further proof that, when faced with elections, Spanish administrations at all levels find it almost impossible to apply austerity. More importantly, it left Mr Rajoy facing a whopping €45 billion ($59 billion) adjustment if he was to meet the 4.4% mark. Little surprise, then, that the prime minister let it be known that he would appreciate it if the EU gave him a bit of leeway. How about a new, more realistic, deficit target? But the hawks refused to blink. Spain's government muttered angrily about a handful of Brussels bureaucrats digging their heels in. So today it decided to go it alone. Despite the considerable loosening, Mr Rajoy insisted he would remain Señor Austerity. His new target will still require an adjustment of close to €30 billion. That is roughly the same as the "Save Italy" programme of Mario Monti, Italy's newish prime minister. And that is to be spread over three years. In Barcelona this week and in Valencia last week demonstrations against education cuts turned nasty when (admittedly small-scale) violence erupted. The head of steam building up against Mr Rajoy's government will continue to grow. A general strike is expected for March 29th. Mr Rajoy has already pushed through serious reforms of the labour market, of banks and of budgetary rules for the future. These have been roundly praised outside Spain. But none of this will help the country in the short term. Indeed, the government sees a total of 630,000 jobs disappearing this year. That will push unemployment to 24.3%. Youth unemployment may well top 50%. Yet the real task of cutting social spending has barely begun. Spain's 17 regional governments, which are responsible for education and health spending, jointly failed to reduce their deficits at all last year. They were the chief culprits, in fact, of Spain's 2011 deficit miss, jointly accounting for an overspend worth 2.9% of GDP against a target of 1.3%. Even hawkish Catalonia, which within Spain took the path now being trodden by Mr Rajoy within Europe and rebelled against its Madrid-set target in 2011, failed to meet the 2.6% it unilaterally set itself instead. Artur Mas's government calculates that it came in a full percentage point above that. The prospect of that experience being repeated at national level is what worries markets and the rest of the EU. Can Mr Rajoy meet the targets his government has set itself? His rebellion today, announced hours after the signing of the EU's fiscal pact, makes the EU's stability measures look weak—and sees Spain run the risk of facing EU sanctions. If Mr Rajoy fails with his more modest adjustment, it will not just be his own credibility that is blown.