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Tuesday, January 03, 2012

Don't Put Those Scissors Away, Señor Rajoy...

Spain's new centre-right government took office on 22 December, just in time to dump a veritable lump of coal into the Christmas stockings of people across Spain: a package of spending cuts and tax hikes worth around €16 billion for 2012. To be fair to Spanish Prime Minister Mariano Rajoy's cabinet, some of the measures adopted are quite bold.

In particular:
  • Both personal and capital income taxes will be subject to a temporary increase, depending on individual earnings. Spanish Treasury Minister Cristóbal Montoro (see picture) explained that the decision was taken in order to avoid raising VAT rates instead, an option which he said would have been more harmful for the country's growth;
  • Spanish public sector workers will see their salaries frozen this year, and will also be asked to work more (37.5 hours per week instead of the current 35). The salaries of those who refuse to do so will be cut accordingly;
  • Civil service will be significantly slimmed down, with the abolition of 30 Directorates-General;
  • State subsidies to political parties, trade unions and employers' associations will be cut by 20%.
Despite this landmark austerity package, another one could be along as soon as Thursday. In fact, the target of €16bn in cuts was based on Spain meeting its deficit target of 6% of GDP by the end of 2011.

Unfortunately, judging by what various Spanish ministers have been saying over the weekend, the target is going to be missed by at least 2% of GDP. Interior Minister Jorge Fernández Díaz, said yesterday that Spanish deficit could be 8.2% of GDP at the end of 2011. If this were the case, he added, the government would have to cut around €38 billion in order to stick to its commitment to bringing public deficit down to 4.4% of GDP by the end of this year.

In other words, tough sacrifices lie ahead, and they are not likely to be received particularly well in a country which spawned the indignados movement and one where, according to government figures published this morning, almost 4.5 million people did not have a job in 2011 (a 7.86% increase on 2010 figures).

One thing is certain: the biggest test for Rajoy remains the radical reform of the labour market, which he promised during the last electoral campaign. Trade unions - possibly with some support from the opposition Socialist Party - may take to the streets, with several demonstrations and general strikes taking place across the country. However, if Rajoy and his cabinet do not stick to their guns now and fail to deliver, the Spanish economy will miss a crucial opportunity to try and boost its competitiveness in the longer term - which in turn might raise questions about Spain's future within the eurozone.

2 comments:

Peripatetic Scribe said...

Spanish government aiming to do the best it can. However, nothing was said about the building bubble, problems with Spanish banks or the palpable lack of central control over the budgets of the regions (wherein may lie some quite evil skeletons). You're right - unless these problems can be solved in the near term, his scissors will indeed be further required.

Rollo said...

Spain is being sucked dry by Euro membership, with a currency to high for them, too low for Germany. Last year, 20% unemployment sounded bad; now it would sound good, with 23% reached and growing. Nothing eles can grow in Spain til they sever the link with the Euro.