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Monday, July 16, 2012

Lack of clarity plagues the Spanish government

Once again the lack of clarity coming out of the Spanish government has resulted in it getting a bashing by the press over the past few days, both in Spain and across Europe. The source this time was the press conference on Friday announcing the new €65bn in austerity measures – unfortunately at the time the government seemed unwilling to shed any light on exactly how and where these cuts will be made.

Fortunately, the Spanish press has published a paper circulated to foreign investors by the Spanish government, which fills in some questions regards the structure of the new fiscal consolidation programme (see here for the full document).

Despite providing some info, the doc remains fairly vague and raises plenty of questions, see our thoughts on the most interest points below:

·         The document lays out €56.44bn in savings. However, it is not clear where the remaining €8.5bn or so in savings - necessary to get to the total €65bn announced - will come from. El Mundo suggests that the additional money could come from changes to environmental and energy taxation; 

·         Around €9.22bn of consolidation looks set to come from savings due to increased efficiency in public services and efforts to reduce the public sector wage bill. There is little additional detail on how either of these will be achieved. We are particularly cautious over the ‘efficiency’ gains – there is no doubt that some are there to be made, but placing such a large amount of importance on such an uncertain area, without having conducted any discernible research on where savings could be made in this respect, seems overly optimistic at best;

·         A large amount of the savings is also meant to come from tax increases. This is despite the likes of the IMF and OECD often vocally supporting a more even split between tax increases and expenditure cuts, probably with more of the burden falling on the latter;

·         Furthermore, the rise in VAT is expected to do much of the legwork in terms of raising funds – around €22bn in fact. This in spite of Spanish Prime Minister Mariano Rajoy's previous pledges not to increase VAT. The potentially regressive nature of VAT is well known and with unemployment at record levels and large amounts of the population struggling to manage their finances, the move may not be well received and could be incredibly harmful. Increasing a tax on transactions could also dent consumer activity at a time when it needs to be boosted;

·         Much of the burden of implementation, particularly on the tax front, will fall on the autonomous regions. The disputes between the regions and the central government is well documented and could potentially lead to implementation problems, particularly since many of them may be more inclined to drag their feet on fiscal consolidation measures which could dent economic activity in their region.

Overall then, this is the most detail we have seen on the planned cuts but yet falls woefully short of providing a clear picture on how exactly the Spanish government will go about making the necessary savings within the necessary time frame. Given the huge questions surrounding  the Spanish bailout, many of which are out of the government’s hands, it’s more important than ever for the Spanish government to bring clarity to the issues which they can control.

3 comments:

Rollo said...

Surely it is blatantly clear. The spanish banks are grossly undercapitalised. The EU has cunningly said they will help out the banks directly instead of increasing national debt. The EFSF and ESM which will carry out the bailout, perhaps, sometime, is depending on nations chipping in; and Spain and Italy are among the places that these funds will get the money from. Big sound of penny dropping, or the Euro dropping, in the bond markets.

Anonymous said...

Seriously, what madness made the Spaniards elect Mr Rajoy as their Prime Minister? I only met him twice at news conferences but I do have the impression that Mr Rajoy neither has the skills nor the knowledge to deal with this crisis. If nobody in Spain or at EU level comes up with a CREDIBLE plan to solve the banking crisis and reduce the Spanish nanny state to sustainable levels, the country will be dead on the water by the end of the summer.

Rik said...

1. The problem with Spain is not so much the percentage of debt, it is that nobody sees them getting it under control with 25+% unemployment and 50+% youth unemployment. And not much structural measures.

2. Mainly raising taxes imho also not a good sign. The 'business' model buying growth with borrowed money didnot work before and with much higher interest now is simply definitely not realistic (for the future).
3. The only realistic option is making private business generate growth and cut red tape. However you donot get private business restarted by increasing VAT and give their clients/customers less to spend.
4. Simply looks like the strategy first get gov deficit under control and start from there.
Simply waisting time. A lot of government things simply will not be affordable anymore.
Better start cutting these asap iso increasing tax and work as a drag on the part of the economy that has to do the job.