Spain has been without a government for almost a year. Moreover, given the current political impasse, there is a rising risk that it might not have one before the end of the year. So far, the economic performance has not been obviously affected, but, according to Fabio Balboni, european economist at HSBC, the fiscal performance has been.
Despite strong growth, the deficit has been broadly in line with the previous year, which at 5.1% of GDP was worryingly high.
"Low inflation and temporary job creation are all behind the disappointing revenue growth and difficulties cutting spending in real terms, but there have also been some tax giveaways. In total, we estimate the fiscal stimulus is adding about 1% to GDP growth this year."
But the lack of a government might have more serious economic consequences from here. If the 2017 budget cannot be approved by the end of the year, all of the main spending items will be frozen at current levels, including wages and pensions. That would be equal to spending cuts of about 1% of GDP. This might help to reduce the deficit, but it would also have negative consequences for growth. This risk should also provide a strong incentive for the political parties to avoid a third election.
In October, Spain also faces a new round of negotiations with Brussels. The biggest risk is the suspension of the EU's structural funds, worth about 1% of GDP. But given the anti-austerity mood prevailing in Europe at the moment, and the political situation, we don't think the European Commission will be too tough. However, once a government is in place, Brussels will want to see more progress made on the deficit reduction.