national debt

   In order to join the European Monetary Union on 1 January 1999 Spain must first fulfil the convergence criterion for public debt, which states that the budget deficit must not exceed 3 percent of GDP and total public sector debt 60 percent of GDP. The latter figure was breached in 1994 at the end of three years of recession. More significantly, the yearly budget deficit had been well above the convergence limit for a number of years, with a peak of 7.5 percent in 1993. It declined to 6.7 percent in 1994 and to 6 percent in 1995. Medium-term deficit projections suggested that the fulfil-ment of the 3 percent criterion would be possible if proceeds from privatizations were satisfactory, planned spending cuts were enacted, and tax elasticity remained as before, with the upturn in the economy producing a corresponding increase in revenues. In trying to control the deficit, the central government faced a number of major problems: the constant revenue shortfalls of the social security system, which necessitated transfers from central funds; the huge salary bill of civil servants with security of tenure; and the tendency of regional governments to run up their own deficits. Indeed the latter phenomenon has been the chief reason for the breaching of the 60 percent limit referred to above, 10 percent of the national debt having been incurred by regional governments and municipal authorities. The bulk of the loans taken out by these governments and municipalities have not required central government authorization, and although the law on the financial regime of autonomous communities (LOFCA) is supposed to limit regional indebted-ness by imposing a ceiling on financial costs of 25 percent of current revenue, several regions have ignored this limit without corrective action being taken against them, owing to the political weakness of the central government. Similarly, the requirement that all long-term borrowing be used for investment has been widely ignored, thereby illustrating the difficulty of imposing fiscal prudence on seventeen regional governments of different political persuasion facing different kinds of problems.

   At the level of central government the management of the national debt is done by wholly orthodox means, without recourse to direct financing by the central bank (Banco de España), which the Treaty of Rome expressly forbids. Treasury IOUs (pagarés del Tesoro), sold at a discount on their face value, were popular in the 1980s because they enjoyed favourable tax treatment, but were phased out in the early 1990s.

   Instead greater use has been made of short-term Treasury Bills (letras del Tesoro) and medium- and long-term government bonds. About one-third of the national debt is in the form of three-month, six-month and twelve-month bills and just under 50 percent in three-year, five-year, ten-year and fifteen-year bonds. Borrowing in denominated foreign currency amounts to about 10 percent of the total. Financial markets have favoured government bonds in recent years, enabling the Treasury to finance the deficit comfortably. Additionally, the Treasury holds a sum equivalent to about 5 percent of total debt at the Bank of Spain which it can call upon to iron out shortterm differences between outgoings and revenues at moments of unfavourable market conditions.

   Further reading

   - Chislett, W. (1996) Spain 1996. The Central Hispano Handbook, Madrid (chapter 8 explains how the public deficit is financed).

   C. A. LONGHURST