For a start, each year’s deficit translates into higher debt and debt-servicing burdens, which already stand at 67 per cent and 3.4 per cent of GDP, respectively. 5 Put differently, the 196 million euro in interest due on the debt next year is equivalent to what the Government would spend on medicines  2  Structural Issues Report 2010, which focuses on the impact of the energy markets on the macroeconomy. A detailed report is to be published next year in the form of an ECB Occasional Paper. 3  Weathering the challenges, in Ernst & Young’s 2009 Malta Attractiveness Survey. 4  Paul Krugman, The Age of Diminished Expectations: US Economic Policy in the 1980s, MIT Press, 1992  5  Estimates taken from the Budget speech 2010. 4  BIS Review 154/2009  in three years at today’s prices. To complete this perspective, despite the reduction planned from 2011, the general government deficit in that year is still expected to remain just above the 3 per cent benchmark, and the forecast reduction to 2.9 per cent in 2012 is contingent on seemingly optimistic nominal growth assumptions. What are the options for reducing the deficit? Since any increase in the tax burden, already high at around 40 per cent of GDP, would have a negative impact on competitiveness, expenditure restraint seems to be the only possibility. This option is more complex than it might seem, however, because of the structure of recurrent government spending.
Combined with the growth differential the Spanish economy still enjoys, this has allowed Spanish institutions to negotiate the difficulties thrown up last year with a limited impact on their earnings, and this despite the difficulties in Latin American markets. In turn, historically low default levels in the domestic market, despite the strong expansion of credit in recent years, and the strength of own funds mean that, on the financial side, there are no constraints on the process of economic recovery. In this setting, rising to the challenge of a complex international financial situation underscores the importance for institutions of continuing to strive to improve the efficiency and solvency of our system. They must apply greater rigour to the analysis, extension and monitoring of credit transactions and  BIS Review 31/2003  7  make recovery procedures more flexible. The heightened competition in the Spanish banking industry, with the subsequent benefits in terms of efficiency for borrowers and depositors, will - combined with historically low interest rates - require of banks a major drive to cut costs so as to increase efficiency. The challenges posed by the current cyclical juncture should not see us forget other more structural and medium-term challenges affecting financial institutions and, specifically, banks, savings banks and co-operatives. Given the far-reaching consequences for banking, such challenges include most notably the New Capital Accord and the implementation of International Accounting Standards (IAS). It should be clear that these new regulatory aspects go beyond a mere alteration of laws, decrees or Banco de España circulars.