By Nick Mann | 11 May 2012

The European Union’s overall budget deficit will fall in 2012 and 2013, but government debt will increase, the European Commission said today.

In its spring forecast, the commission said the deficit would fall from 4.5% of gross domestic product in 2011 to 3.6% of GDP this year and 3.3% in 2012. For the eurozone, it forecast a fall from 4.1% of GDP in 2011 to 3.2% in 2012 and then to 2.9% next year.

These improvements in the budget balance would ‘almost exclusively’ be driven by increasing government revenues, particularly through indirect taxes, the commission noted.

Today’s deficit forecasts for 2012 are an improvement on last autumn’s, which were 3.9% for the EU and 3.4% for the eurozone.

But government debt as a proportion of GDP is predicted to rise at the same time in ‘most’ member states in 2012 and 2013. For the EU as a whole, it is forecast to increase from 83% last year to 86.2% in 2012 and 87.2% in 2013. A similar situation is predicted for the eurozone, with rises from 88% in 2011 to 91.8% in 2012 and 92.6% in 2013.

These increases were linked to interest payments on government debt and low growth, the commission said.

Among Europe’s struggling economies, the commission said budget deficits in Spain, Portugal and Greece would be worse than it forecast six months ago. Spain’s is predicted to be 6.4% of GDP in 2012 (compared with 5.9% for the earlier forecast) and 6.3% in 2013 (compared with 5.3%).

The picture for Greece is similar, with 7.3% now forecast for this year (compared with 7%) and 8.4% for 2013 (compared with 6.8%). Portugal’s outlook is slightly more positive. Although this year’s deficit is now expected to be 4.7% of GDP (autumn 2011 forecast – 4.5%), for 2013 the forecast has improved from 3.2% to 3.1%.

The outlook for the EU economies is mixed. If Spain continues with its current policies, it will be in recession throughout 2012 and 2013, the commission said, with its economy forecast to shrink by 1.8% this year and 0.3% next year.

Cyprus, Greece, Italy, The Netherlands, Portugal and Slovenia are all also forecast to remain in recession this year, but all apart from Greece are expected to record growth next year.

For the EU as a whole and the eurozone, the commission stuck to the forecasts it made in February, with EU GDP expected to remain unchanged this year and the eurozone economy set to shrink by 0.3%. For 2013, growth is forecast at 1.3% in the EU and 1% for the eurozone.

Olli Rehn, commission vice-president for economic and monetary affairs and the euro, said this showed that while a recovery was in sight, the economic situation was still ‘fragile’.

‘We are witnessing an ongoing adjustment of the fiscal and structural imbalances built up before and after the onset of the crisis, made worse by the still weak economic sentiment. Without further determined action, however, low growth in the EU could remain.

‘Sound public finances are the condition for lasting growth, and building on the new strong framework for economic governance, we must support the adjustment by accelerating stability and growth-enhancing policies,’ he added.