Spain's public sector deficit 3.8% of GDP

Spain's public sector fell into a higher-than-expected deficit of 3.8 per cent of GDP during 2008, but the government said it hoped to bring the fiscal shortfall back close to a European ceiling of three per cent by 2011.

Economy Ministry had forecast a deficit equal to 3.4 per cent of GDP in 2008 following a record 2.2 per cent surplus in 2007 that was the second largest in the eurozone.

"We hope to rebalance fiscal accounts in a relatively short period," Treasury Secretary Carlos Ocana told a news conference after announcing the first budget shortfall in four years as the country slid into recession. "The public deficit is sustainable," he said, adding the government expected the deficit to peak at 5.8 per cent of the GDP this year then fall close to three per cent by 2011.

The government's deficit exit strategy rests on Spain returning to relatively strong growth by 2011, putting it in a position to eliminate fiscal stimulus and financial support plans, Ocana said.

"When this happens we can cut large spending measures and fiscal measures in place now. This will require certain political muscle," he said.

The European Commission has started disciplinary action against Spain and five other European Union countries for exceeding the EU budget ceiling of three per cent of GDP. The commission, and most private economists, expect Spain's economy to shrink again in 2010 and see the government's forecast for 1.2 per cent growth next year as wishful thinking.

Carlos Maravall, economist at the Analistas Financieros Internacionales consultancy, doubted the government's capacity to cut its deficit.

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