In June, the European Council approved another cutback in the path of fiscal consolidation. The latest deficit target for this year has been set at 6.5% of GDP, just 0.5 percentage points below the figure posted in 2012 (having deducted the effect of losses due to the bank bail-out). The target therefore seems attainable: last year the adjustment carried out amounted to 2.0 p.p.

However, the fiscal effort that needs to be made has not diminished (see the Focus «The pace of fiscal consolidation eases but not the effort», published in May's MR). Moreover, although the figures for budget spending available to date are similar to those for last year (–4.1% of GDP in 2013 and –4.0% in 2012), this comparison could be misleading. The reason: a large part of the deficit adjustment measures carried out in 2012 were concentrated in the last few months of the year (such as the elimination of the Christmas bonus for civil servants, extra revenue due to the tax amnesty and the VAT hike). However, no similar effort is expected to be made in the last part of this year. Consequently, the fact that the deficit is now slightly lower than the figure for last year is no guarantee that this difference will be maintained, let alone widen.

The answer to why the deficit is not being adjusted further can be found in the trend in revenue. The reduction in social security contributions and personal income tax during the first half of the year contrasts with the growth forecast for 2013. Certainly, the improvement in economic activity during the second half of this year will probably ease its rate of decline but the forecasts used in the central government budget are unlikely
to be met. The deviation of the main items of revenue might even reach 1% of GDP.

However, this could be partly offset by the better performance from spending on debt interest payments. In the case of the central government, this faster than expected fall in the cost of debt could represent a saving in expenditure of 0.5% of GDP, compared with the budgeted level. This improvement is particularly important if we take into account the fact that it has not come from any significant rise in the average life of the debt. The effects of the improved confidence, therefore, are quite appreciable. In short, the deficit targets for 2013 are attainable but will require renewed effort in the second half of the year.