MADRID | Elvira Rodríguez, who chairs the Spanish parliamentary committee on Economy and Competitiveness, and is a former State secretary for Budget and Expenditure, had two words to say about the government’s public budget: rigour and responsibility.

Rodríguez published Monday an op-ed in the business daily Cinco Días, probably in advance of the heaviest wave of criticism that the country’s budget plans have had to endure during the last decade. She imposed herself a difficult task, but an arguably necessary one since Europe’s eyes are watching Spain’s economic behaviour very intendedly indeed: will president Mariano Rajoy’s programme keep the nation at bail until global recovery steps in and rescues it instead of falling into the default trap?

After having marked a no-trespass line in front of Brussels’ demands for extreme austerity, Spain has now to deal with even more pressure to get it right and cut down its public deficit, reactivate its productivity and tame the unemployment dragon.

Rodríguez said today that it was a special budget, for many reasons:

“Without any control over monetary or exchange policies, the State budget is an essential tool in the hands of the government to achieve its primary objective, that is, wealth creation and, therefore, employment, without which it will be impossible to guarantee basic public services,” she warned.

She admitted that fiscal consolidation is the simple consequence of the trouble the country is experiencing in obtaining credit, but did not forget that

“it also is our unwavering commitment with our European partners and an indispensable decision to generate much needed confidence to restart funding flows.

“The State budget for 2012 is the adequate response to a deficit target of 3.5% of GDP for the central state administration, ie, it incorporates an adjustment of 1.6% over the last budget. But this adjustment does not reflect the reality of all the decisions taken, since in practice corresponds to a fiscal effort in the uncommitted transactions that is much higher.

“Indeed, the negative trend in public revenues due to the current economic conditions and the obligations derived from the interests to be paid, the territorial administrations’ financing and the non-contributory social security benefits and pensions have brought cuts in spending up to 2.5% of GDP, €27,3 billion, spread over tax measures, an 0.8%, and expenditure, 1.7%.

Rodríguez noted that current expenditures will be reduced by  €4.831 billion and capital expenditures will fall by €5.477 billion. Tax measures will raise income by €12.314 billion, although she highlighted that some of the changes in personal income tax are temporary.

“In any case, it is clear that the government and Spain are doing their homework.”

Details are coming on Tuesday. And this time, the audience will need more than hopeful phrases to give an approval.

The post In defence of Spain’s 2012 budget appeared first on The Corner.

MADRID | The Spanish government claims the 2012 budget to be the toughest ever. On face value it embodies a 2.5% GDP deficit reduction, an awesome effort by any standard. Slashing expenditure amounts to two thirds of the squeeze, the rest falling on tax adjustments. Will budgetary crunch depress activity or axe main spending policies? A closer look dispels any anxiety over these daunting effects.

Many of the cuts come from budget lines that usually failed to be disposed of or whose efficiency was openly questioned. Largely misused employment plans and coal mining schemes amounting to no more than political facade, stand as striking examples of money that can be saved at no cost. Idle leftovers have been squashed in a one-off move that presumably will have to be reversed next year. The government has severely reduced transfers to public enterprises, thus forcing them to resort to indebtedness to finance their needs. But real cuts in spending policies are far less pronounced than expected.

A 10% drop in current goods and services will affect demand to the negligible extent of 0.03% GDP. The same can be said of public investment due to be recouped by 20%, equivalent to 0.1% GDP. True enough, civil servants pay freeze plus a stiffer context in investment-intensive public enterprises will contribute to further depress overall demand. But this budget has shown there was ample room to streamline expenditure without dismantling any significant policy or imposing a heavy toll on economic activity.

On the revenue side, most of the adjustment is borne by large firms, by reducing the scope of their fiscal deductions and increasing paid-in-advance instalments. These measures will bring only limited relief to a free-falling corporate tax whose receipts have shrunk by 60% over the last years. They will address to a rather limited extent the paradox that while Spanish nominal rates rank among the highest in Europe, IBEX corporations pay fewer taxes than their Irish counterparts. The government has undoubtedly fallen back from previous plans to crack down most unjustified deductions. Instead, it is proposing a waiver for previously undisclosed taxable income, in exchange for a single 10% pay-off on hidden capital. It is questionable this half amnesty will fulfil expectations as most of the black money linked to the real estate boom has already found a safe harbour.

Will this tight budget firmly secure the deficit target? A margin of doubt is to be cast on this fundamental issue. While expenditure is not likely to suffer extensive overruns, tax receipts are reckoned to increase by 4.3%. Even allowing extra revenues to match forecasts, meeting such a sanguine objective would involve a year on year modest 3% fall on a homogeneous basis. A hardly consistent figure if compared to the hugely depressed economic outlook. Should GDP fall by 1.7%, tax revenues will forcibly take a plunge forcing further budget squeeze to get on the safe shore.

The post Spain’s Budget less daunting than expected appeared first on The Corner.

In addition, they say, the State will fight fraud. This simple appeal suggests to me that Madrid does not have much confidence in achieving the goal, as they are already trying to tap other sources to fill expected known unknown gaps.

Here’s the paradox, though: the private sector is squeezed to close the deficit, when precisely companies and households are in the worst situation. Pensions will be updated (error: pensioners should bear a bigger adjustments) and public worker salaries will be frozen (error: after all, they have secured a job).

With the measures previously taken, income tax revenue was squeezed to the maximum, which, as its name suggests, radically reduces consumption. Now, job-creating companies will get the hit. And in all truth, Spain already was one of the countries that penalises productive activity the most, via taxes or via national insurance, the worst anti-labour national insurance system among our neighbours’.

All this was done under the assumption, quite doubtful, that real GDP would fall by 1.7% only. This forecast came prior to the new fiscal package, which leads us to believe that if the official calculations are right, and it was assumed that they fall short, the effect of subtracting €10 billion from public spending generates a GDP contraction of 0.1%. Therefore, €27 billion would mean at least 0.27 percentage points to add up to the initial figure of 1.7%. That gives us a 2% drop in real GDP, with which central government deficit would not be 3.5%, but 3.6%. Small beer.

Unfortunately, this will cause more unemployment, even despite the labour reform. The unemployment rate could reach 26% easily. Not to mention the job cuts coming from the regional governments.

I think Europe, but also the last two Spanish governments (PSOE, PP) are utterly mistaken. There is an article by Barry Einchengreen in which he says it is wrong to be harsh with fiscal spending when this can abort recovery. Given that we are heading towards a recession, probably as strong as that of 2008-09, readers will surely see the irony.

I think governments of the so-called PIIGS err in their isolated strategies, which should be collective: the de facto leaders of the euro zone just want to save the euro, which have fared quite profitably for them (they would have pushed its breakup otherwise.) If they want the euro to survive, the PIIGS should unite instead of slapping each other across the face (as Italy’s Monti and Spain’s Rajoy have recently done), demanding a different pace in introducing austerity and a different monetary policy. It is the only way they can restore growth.

And it shouldn’t be hard for the periphery countries to force a change of course: after all, the so-called core Europe do need them to pay their debt back in euros. Like with any creditor who experience difficulties to get their money, longer terms and better financial conditions will in the end be accepted.

Brussels does not seem open to considerate this new scenario. Brussels behaves stubbornly under the control of a stubborn master. But I do not see another way out. It’s either trick, or the euro.

The post Trick or treat: the Spanish budget appeared first on The Corner.

By Juan Pedro Marín Arrese, in Madrid | The Spanish government will unveil today its budget bill for 2012. In the good old days, analysts and observers bent over its pages to find the clues for public sector priorities in the year. Nowadays you can dispose of such a demanding task. Brussels has unravelled its complexity, reducing the whole exercise to the simplistic aim to meet, no matter how, the deficit target. I bet it will match to the penny the 5.3% objective imposed by Eurocrats. The rest can be regarded as fiction literature: just good for those seeking an evasion from the surrounding reality.

Does it make sense to trim the budget to a single figure? In a way it does, inasmuch as a country performance is abridged to stick to that simple rule. Needless to say, any fiscal consolidation process involves keeping up the commitment entered to follow a certain path. But the key issue lies on whether deficit stands as the best test for that purpose. After all, it amounts to a balance between maximum authorised expenditure and a mere forecast on receipts you envisage to cash.

Even allowing macroeconomic perspectives to be fairly squared, expected income tends to diverge from ultimate figures by more than 1% GDP on average. In the current volatile and depressed conditions slippages could end up in utter disarray. So, what is the purpose of sticking to such a deceitful goal? The only plausible answer lies in Euroland tendency to turn complex issues into easy to measure formulae. As in the Achilles and the tortoise paradox, crude assumptions to implement austerity as the sole tool for slashing deficit has led to widen it up by depressing economic activity. No one seems to be aware that trying to squash budget deficit in the absence of growth can turn into nightmare.

Spain seems the next candidate to spiral down into a vicious circle. No single country has ever been forced to axe its budget in such an abrupt way. Tax squeezing will significantly increase, spending cuts proving unable to match the huge gap to be filled. Mending the existing deficit so hastily will only contribute to further undermine consumer confidence, dragging down both activity and fiscal revenue. An unpalatable prospect most likely to send the economy plummeting. Undoubtedly, tough action seems unavoidable if fiscal haemorrhage is to be sealed. But one fails to capture the logic of focusing exclusively on budgetary imbalances when sluggish growth lies at the heart of current shortcomings. Wouldn’t it make sense to provide some breathing space to the ailing Spanish economy?

A more realistic timetable to scale down both debt and deficit might turn out to be a better solution than putting Spain under close scrutiny and inevitable suspicion. At the end of the day, imposing unattainable objectives only fuels frustration. Missing the target will only make happy those  turning risk exposure into fat profits.

The post Why such a fuss about Spain’s budget? appeared first on The Corner.