Spain can’t avoid austerity conundrum

March 30, 2012

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It’s hard to get the population revved up for a general strike in a country with a 23 percent unemployment rate. Indeed, the one in Spain on March 29 – aimed at stopping the country’s recent labour reform – was relatively subdued. There is an air of inevitability about the upcoming austerity, to be outlined on March 30 in the conservative government’s first full-year budget. Too much austerity could be self-defeating and even unrealistic, but Prime Minister Mariano Rajoy doesn’t have much choice.

The scale of adjustment on the cards looks daunting. The central government has already clocked up a 2 percent deficit in the first two months of the year, against 1.3 percent in the same period in 2011. The gap is mostly explained by an acceleration of financial transfers from the centre to the regions and the state welfare system, according to Deutsche Bank. The underlying deficit increase was marginally above last year’s. The state can take some comfort that some of the tax increases announced in December will start to take effect in March.

Rajoy has already announced some of the measures, such as an increase in spending cuts at the ministries, and a freeze of civil servants’ salaries. Companies are braced for having to pay more taxes, either with the end of some deductions or through straightforward rate hikes. But concerns remain about the finances of the regions, which accounted for two-thirds of the deficit miss last year. Spain recently admitted to a budget shortfall of 8.5 percent of GDP in 2011, against its original target of 6 percent.

Economists believe it will be difficult for Rajoy to shrink the deficit to the 5.3 percent agreed for this year with the European Commission and other euro members. This looks near impossible if the government persists in its refusal to raise value-added tax. Sticking to austerity at all costs may even be self-defeating if it sends the economy into a tailspin.

But Rajoy has already burned political capital by unilaterally setting his own deficit target and taking what was perceived as a defiant stance by his euro partners and the European Central Bank. There will be no easy way out of this conundrum.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/