The EU cleans up Spain's cover-up deficit

To finish the 2012 fiscal year with a 6.7% deficit, finance minister Cristóbal Montoro pulled an accounting trick that increased overall revenues. Yesterday the EU parsed out the Ministry of Finance's scheme to determine how Spain's balance sheet really looked at the end of the year. After inspection, its deficit rose to 7%.

The inspection was a big blow for Montoro, who tried to make it look like revenues were high by collecting tax payments from corporations early and delaying tax rebates for Spain's personal income tax and VAT. He covered up 8 billion euros of deficit without factoring in the bills that regional governments are still keeping hidden away with Montoro's tacit assent. Now the European Commission is requiring the finance ministry to include unpaid tax rebates in their assessments. The consequence is that the deficit will increase for the first months of the year, although it will drop again when 2012 tax refunds are no longer part of the budget, tax revenues fall because advancing partial corporate tax payments will cause a drop in earnings for the next fiscal year and, as the Bank of Spain warned, it will be really hard for the government to meet its promise to lower the personal income tax in 2014.

The most important aspect is that a 7% deficit will require the national and state governments to make greater cutback efforts even after the regions get a longer, more forgiving time frame to meet a 3% GDP/deficit ratio. The need to continue reforms goes against the current attitude held by regional governments and the Ministry of Finance. It is difficult to demand action when you don't set a good example. To set itself on the right course, the government should carry out all its reforms in the public sector and tax programs, because the EU's newer and gloomier forecasts for the Spanish economy mean that only major changes can change the structural deficit.