Spain ups 2021 deficit target, looks to avoid austerity in coming years

MADRID (Reuters) -Spain will continue with expansive measures to support the economy and post higher budget deficits than dictated by EU fiscal rules through 2024, the budget minister said on Friday as she raised this year's deficit target to 8.4% of GDP.

Maria Jesus Montero said she would seek to extend the current suspension of the fiscal straightjacket rules that set a 3% budget gap limit on EU member countries into 2022, but expected the fiscal ceilings to return by 2023.

Spain upped this year's budget deficit estimate from an initial 7.7%, but at 8.4% it would still be an improvement on 2020's 11-year high of 11%, after the economy shrank in the first quarter due to COVID-19 restrictions.

The gap should further narrow in 2022 to 5%, then 4% in 2023 and finally to 3.2% in 2024, she said, meaning that Spain does not plan to meet the 3% threshold earlier than 2025.

Unwinding the heightened public spending will take time and special measures to fight the pandemic's economic impact will remain in place as long as necessary, Montero added.

"We will not repeat the mistakes of the past," she said, referring to austerity policies imposed in the wake of the financial crisis in 2012, which have depressed public spending over the past decade.

The deficit figures do not include the impact of investments set out under an economic recovery plan, which Spain is set to present to the European Commission later on Friday.

Spain expects to receive an early payment of European Union recovery funds later this year, avoiding the need for further debt issuance.

As tax collection increases, public debt should edge lower this year to 119.5% from 120% in 2020, gradually falling to 112.1% in 2024.

Earlier on Friday, National Statistics Institute data showed the economy contracted 0.5% in the first quarter, in line with expectations.

The government cut its 2021 growth forecast to 6.5% earlier this month.

However, Montero said the quarterly data masked a solid performance in March and pointed to a nearly 15% year-on-year surge in retail spending as a positive sign.

(Reporting by Inti Landauro, Belén Carreño and Nathan Allen, editing by Andrei Khalip/Mark Heinrich)