Spain's strong GDP growth may reduce fiscal imbalance

Spain's economy posted 0.9% q/q growth in Q1, is expected to accelerate further in Q2.

Barclays estimates, in 2015 the cyclically adjusted fiscal balance will be slightly accommodative. The bank sees some downside risk to the deficit target of 4.2% of GDP, mainly related to the electoral cycle. The consolidated budget balance through April (excluding municipalities) has been reduced by 10.7% y/y: the deficit reached 1.05% of GDP versus 1.2% in April 2014. 

Public expenditure was higher than expected in Q1 15, probably driven by the regional and municipal elections in May. Similar slippages on public expenditure in H2 15 is expected. Moreover, the government has announced cuts to the personal income tax rate, applicable in July 2015 and worth EUR1.5bn. 

According to Barclays, "Overall, we do not think the extent of fiscal slippage this year will be large (less than 0.5%), mainly because strong growth is compensating somewhat, but a tighter fiscal stance will be needed in 2016 to meet the government's medium-term fiscal targets and debt-reduction objectives."