The Financial Times
Just like the bullfighters in his country, Mariano Rajoy faces a dangerous beast. The austerity package unveiled by the Spanish prime minister and his colleagues last Friday aims to bring down his country’s budget deficit from 8.5 to 5.3 per cent of gross domestic product. Were he not to impose this draconian budget Spain would breach the target it has agreed with the EU.
To be fair to Mr Rajoy, he should never have been put in this position. The EU should have allowed Madrid to lift the target to 5.8 per cent – as Mr Rajoy had originally demanded. Spain’s public debt is one of the lowest among developed countries. Too much austerity could reduce growth and augment the risk that Madrid misses its target anyway.
Austerity measures for 2012 amount to €27bn. About €15 of the deficit reduction is to come in the form of spending cuts, and €12bn from revenue-raising measures.
There are doubts on whether the proposed savings will actually be obtained. It will not be easy to take 17 per cent out of ministry budgets, and the decision to freeze public sector salaries is bound to create opposition. Beyond Madrid’s own budget, the central government is rightly seeking to rein in expenditure by the regions, but this has proven hard in the past.
The composition of the cuts is also perplexing. Given the scale of the package, it was clear that all spending, including politically sensitive areas such as health and education, had to take their share of the pain. But cuts to the labour ministry may undermine its vital reforms by reducing resources dedicated to retraining and other active labour market policies.
On the revenue side, the government is relying on a one-off tax amnesty to raise €2.5bn, but it is unclear whether this money will ever find its way to government’s coffers. Showing such clemency to tax evaders may also encourage others not to pay all their dues in the future.
Madrid’s decision to increase the fiscal burden on firms by reducing corporation tax breaks is also odd. This could make it harder to attract the investment that the country needs to resume growth. A better idea would have been to increase taxes on consumption.
This budget risks exacerbating social tensions without creating the conditions that would allow Spain’s bond yields to fall. While the EU is to blame for imposing unnecessary austerity, Mr Rajoy’s budget could have been better designed. It will be a while before his bullfight is over.