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Friday, March 30, 2012

The Toughest Budget Of The Post-Franco Era

The Spanish government has today unveiled the toughest austerity package of the post-Franco era. Pretty extraordinarily, given the country's situation, Spanish Prime Minister Mariano Rajoy didn't take part in the press conference following today's cabinet meeting.

It was therefore left to his deputy, Soraya Sáenz de Santamaría, to announce the bad news, accompanied by Energy Minister José Manuel Soria (on the right in the picture) and Treasury Minister Cristóbal Montoro (on the left). In reality, only some general figures were provided, while a clearer breakdown of spending cuts and tax hikes will be provided on Tuesday, after the package is submitted to the Spanish parliament.

We will provide a more comprehensive analysis then (a research piece on Spain is also in the pipeline, so watch this space).

For the moment, these are the most important measures announced today:
  • The total adjustment (i.e. cuts plus tax hikes) is of €27.3 billion. In reality, this needs to be added to the €15 billion package which was adopted as part of last year’s budget in December, but will be implemented this year. This gives us a total of over €42 billion
What has been done
  • Spanish ministries will have to cut their budgets, on average, by 16.9%. Foreign Affairs (-54.4%), Justice (-34.6%) and Defence (-31.9%) will face the toughest cuts. Agriculture (-7.4%), Health (-4.3%) and Economy (-3.8%) will be the least touched;

  • Electricity bills will increase by 7%, and gas bills by 5%;

  • A 'tax amnesty' will be launched. Tax evaders will be allowed to repatriate capital from abroad and will only have to pay 10% tax on the money (not a bad discount, as the highest tax rate in Spain is 43%). The Spanish government estimates that it can make around €2.5 billion out of this repatriation;

  • Certain corporate tax exemptions will be scrapped, so Spanish businesses will have to pay more taxes from now on;

  • Public investment will also be cut – notably, €1.5 billion will be cut from so-called “Active Employment Policies” (i.e. measures to favour labour market access)
What has NOT been done
  • There will be no VAT increase;

  • The salaries of civil servants will be frozen, but not cut;

  • Pensions will remain linked to inflation;

  • Unemployment benefits will remain untouched.
Will the toughest austerity package of the post-Franco era be enough for Spain to meet the deficit target of 5.3% of GDP agreed with the European Commission? Perhaps too early to tell, but this is where the hard work begins: after the announcements, these measures now need to be implemented...


Rik said...

Spain looks still in denial, like basically all of Europe. They should start with making a virtual picture of their economy when it is financially sustainable. And subsequently work to it.
This is percent work while 10percent work is required.

Looking at the budget the 2 main posts are welfare and the apparatus. The apparatus is too big/expensive compared to the standard set by well functioning countries and way too big and expensive.
Their welfarestate at this level simply looks unaffordable and structurally unaffordable. In a sustainable situation it needs to be much smaller to make it affordable.

What is happening here that basically these 2 major parts of the budget are hardly or not affected.
So the conclusion can simply be they might reach their EU target (although even that is very doubtful) but they are clearly not on the right track, unless you define: 'on the right track', as being so close to a cliff that you almost fall off.

Combining with the fact that clearly the country's management is not in control of the 'spendingapparatus'. Basically a lot of spending is done via the regions who do what they like.
And the fact that their bankingsector is a mess and progress is slow at best. Even worse the LTRO has given some relief to the government, but made the situation in the bankingsector even worse. The already overexposed banks are even tighter chained to the government.

In a nutshell and accident waiting to happen and very likely one way or another running completely out of control. And EZ/ECB actions won't prevent that as largely it is not a one time money issue it is deeply structural and it cannot be solved by these kind of measures only be big structural reforms with alot of hardship or by huge permanent transfers (which look totally unacceptable and are very likely unaffordable, especially longer term, for the rest).

Rollo said...

If it was not so tragic, this austerity would be a joke. With 55% youth unemployment, 22% unemployment generally, and property overvalued by as much as 100% of GDP, there is no way that austerity will help. For how long are those vile apparatchiks in Brussels going to force this nation into penury to 'rescue' (but fail to rescue) the fake construct called the Euro?