Madrid: Spain has staked its financial survival on cutting its bulging deficit, but analysts warn it will miss its key 2012 target, undermined by the very measures taken to try and meet it.

Prime Minister Mariano Rajoy has promised Spain’s European neighbours to cut the public deficit — the shortfall of revenues to spending — to 6.3 per cent of output in 2012, after they let him relax an earlier 5.3 per cent goal.

But a recession aggravated by budget tightening and widening holes in the finances of Spain’s big-spending regional governments have undermined his promise, as warnings have increased that Spain will need a full bailout.

“Nobody now believes it will be able to fulfill the target,” said Alberto Roldan, an analyst at Spanish brokerage Inverseguros.

Another economist, Jesus Castillo of Natixis bank, estimated the deficit this year will be between 7.5 and eight per cent. An overshoot of the 6.3 per cent goal “is in all the forecasts,” he said.

Spain, the fourth biggest economy in the eurozone, massively overshot last year, with spending outweighing revenues by 8.9 per cent of gross domestic product against an initial target of 6.0 per cent.

In 2012, “rumours suggest that the deficit could rise to higher than last year’s,” said Marian Fernandez, an analyst at Spanish bank Inversis, who forecast this year’s deficit will soar to between 9.2 and 9.4 per cent.

Under pressure from European authorities, Rajoy’s government has made the deficit its top priority and has tried to lower it through unpopular savings measures including cuts to pay and benefits, and a sales tax rise.

It says it can save €102 billion (Dh486.07 billion or $132 billion) by 2014 through the measures, which have brought millions of protestors onto the streets.

‘Downward spiral’

The austerity is causing “a downward spiral”, Castillo warned however.

“These measures have an effect on growth, which in turn has an effect on the deficit,” he said. For example, the rise in sales tax discourages consumer spending and thereby lowers tax revenues.

The government’s current growth forecast for this year is for a 1.5 per cent contraction — brighter than the fall of 1.7 per cent forecast by the International Monetary Fund and the 1.8 per cent by the European Commission.

Natixis forecasts the contraction this year could be as deep as 2.0 per cent.

The biggest problem weighing on the deficit is the share accounted for by the 17 autonomous regions that make up Spain. Two-thirds of the budget overshoot in 2011 was attributed to them.

“They are the main risk factor,” said a report by the economic thinktank FEDEA, which forecast a deficit of 2.2 to 4.0 pe rcent for the regions this year — far above the 1.5 per cent target set by the central government.

The figure for the regions had reached 0.77 per cent by the end of June, but this did not reflect the major expenditures that typically fall in the second half of the year.

The central government budget by the end of July had already exceeded the 2012 target for its own share of the deficit — 4.6 per cent against a goal of 4.5 per cent.

A major headache looms for Rajoy in November: he promised during his successful election campaign last year that he would raise pensions in line with inflation.

Spanish media say this would cost some four billion euros, enough to add 0.4 percentage points to the deficit as a share of GDP.

Rajoy has been holding off making a decision on whether to request a bailout from Spain’s neighbours because it is not clear what conditions they would attach to the aid - such as demands for more specific budget cuts.

“Any deviation from the current road map is very dangerous for Spain” and weakens its hand in negotiating such conditions, said Roldan.

He added however that Europe’s decision to ease requirements for Greece and Portugal, after they received bailouts, bodes well for Spain.

“Just as the market is taking for granted there will be a bailout, it is also taking for granted that there will be an extension” of the deficit target for Spain, he said.