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Spain gears for more painful austerity

Economists see need for up to €10 billion more cuts this year

Image Credit: EPA
Demostrators from different protest movements shout slogans at the start of a march to the lower house ofSpanish parliament in Madrid, Spain
Gulf News


Madrid: Spain will announce another round of unpopular austerity measures in a 2013 budget on Thursday, already prompting protests from a public battered by attempts to put the country’s finances in order.

With this year’s budget deficit target looking untenable, the conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions, “green taxes” on emissions or eliminating tax breaks.

The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. It must persuade Spain’s European partners that it can cut the budget shortfall by more than €60 billion (Dh284.97 billion) by the end of 2014.

Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

Spain is at the centre of the euro zone debt crisis on concerns the government can’t control its finances, bitten by its second recession since 2009 which has put one in four workers out of a job and pushed up borrowing costs.

Protests against the cuts are gaining pace. More than 1,000 police barricaded Parliament in Madrid on Tuesday against protesters who planned to form a human chain around the building later in the evening.

Hundreds of demonstrators gathered in different points of the capital before marching to Parliament, saying they were angry that the state has poured public funds into crumbled banks while it is cutting social benefits.

“We’re protesting against the cuts. I’ve had to give up my apartment,” said Ondina, a 30-year-old fine arts graduate who is without a job. She said she can’t survive on an unemployment benefit of €260 euros (Dh 1,234.87 or $340) a month.

Meanwhile, Rajoy is holding back from applying for European aid, which would activate a European Central Bank bond-buying programme and bring down Spain’s punishing debt premiums.

With the threat of the plan alone reducing 10-year yields by around 2 percentage points, the cautious leader, known for keeping his cards close to his chest, is playing for time.

Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections on October 21, pushed short-term yields higher at auction on Tuesday. The government is also expected to set a fresh timetable for economic reforms, on Thursday or Friday, seen as an attempt to pre-empt strict EU-imposed conditions for aid, and help the conservatives save face at home.

Running out of options


Half-year deficit data indicate national accounts are already on a slippery slope that will drive Spain into a bailout.

The deficit to end-June stands at over 4.3 per cent of gross domestic product, including transfers to bailed out banks, making meeting the 6.3 per cent target by the end of the year almost impossible.

“Its going to be difficult keeping the deficit to around 2 per cent in the second half, when the first half was closer to 4 per cent, especially since traditionally, the second half deficit is higher than the first,” said Juan Ignacio Conde-Ruiz, economist at Madrid’s Complutense University.

For 2012, the measures aim to reap savings of over €13 billion, but economists see the deficit missing the target by almost 1 percentage points implying further saving needs of up to €10 billion for this year alone.

Rajoy has been careful to highlight the importance of next year’s deficit target of 4.5 per cent of GDP though any shortfall this year will have to be carried through and will weigh on 2013’s accounts.

After slashing civil servants’ wages, raising value added tax by 3 percentage points — the main VAT has gone from 16 per cent to 21 per cent since 2010 — and cutting health and education spending, Rajoy is running out of options.

More than 60 per cent of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people.

Sources say the conservatives are studying eliminating, or at least limiting, the inflation-linked raise in pensions, which account for around a quarter of all spending.

On Tuesday Deputy Prime Minister Soraya Saenz de Santamaria repeated Rajoy’s pledge that the government would make changes to the pension system only as a last resort, despite recommendations by Brussels.

Under current rules the government must raise pensions in line with inflation in November, but Rajoy has been underdone by his own austerity measures as the VAT hike is seen pushing prices up by more than 3 per cent.

This VAT effect on consumer prices will cost the government an extra €3.5 billion in pensions costs, Conde-Ruiz says, wiping out the €2.5 billion it hopes to raise this year by increasing the sales tax.

Further snips to public servants’ wages, which have seen purchasing power fall by over 25 per cent due to cuts by the former Socialist government and Rajoy, could fuel protests.

Other potential savings include deeper cuts to the ministries, taxes on stock market transactions and so-called “green taxes” on greenhouse emissions, but in they themselves aren’t enough to cover the potential shortfall.

However, a selective reduction of tax breaks could raise as much as €6 billion, according to economists.

“A massive pruning of these incentives could easily bring Spain another €6 billion,” said Juan Jose Rubio Guerrero, president of the Independent Forum of Fiscal Analysts.