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.