Cutbacks: the easy way out for debt-ridden governments

In 2009, the Socialist Party government led by former Prime Minister José Luis Rodríguez Zapatero bowed to Europe's demand to reduce Spain's budget deficit from 11.1 percent of GDP to three percent by 2013, an amount equivalent to cutting spending by 80 billion euros over the four-year period. The target by the end of 2011 was six percent of GDP, which was not met; the year closed with a deficit figure of eight percent, down from 9.3 percent in 2010.

Now, the new Popular Party administration led by Prime Minister Mariano Rajoy says that failure to meet the target means an extra 16.5 billion euros' worth of cuts, and could mean a reduction of a further 36.5 billion euros if the country fails to meet the targets imposed by Brussels.

Implementing these draconian cuts will require the cooperation of the regional governments, the majority of which have been controlled by the Popular Party since last May's regional elections. The regions are responsible for health, education and social services, and these are the areas that will be hit hardest by the cuts.

Just in case any regions decide to break ranks, the new government has stressed that it will be looking closely at their annual budgets. Proposals such as the need for Economy Ministry approval of these finance plans have already raised the hackles of the nationalist parties that control the Basque Country and Catalonia.

Catalan regional premier Artur Mas has accused the government of treating the regions "like schoolchildren." Catalonia has led the way in imposing sweeping spending cuts, and brought forward its fourth consecutive round of reductions since 2009 on the day before the PP swept to power in the November 20 elections by announcing a 10-percent reduction in its annual budget that will primarily affect health, education, and social services.

Under the previous government, civil servants have seen their salaries cut by five percent, while VAT rose by two percent (to 16 percent). Rajoy has already broken his election pledge and announced that taxes are to be hiked further. He has made it clear that more bitter medicine is in the pipeline as part of his commitment to meet EU budgetary criteria.

The government has promised to present in the first quarter of 2012 an overhaul of a rigid labor market that economists say is responsible for the country's structurally high unemployment rate.

It also will present in the first half of 2012 a plan to clean up a banking sector groaning under the collapse of a decade long housing boom.

Opposition politicians and union leaders criticized the new measures. The CCOO labor union said austerity measures taken by the previous government had worsened the country's economic situation.

"The results are clear: five million people unemployed, low growth, lower wage costs, lost social rights and an economy that is on the cusp of a new recession," the union said.

Meanwhile, even before the idea that their budgets would require central government approval was floated, the regional administrations had begun to fall into line, announcing their own spending cuts.

Castilla-La Mancha, which has been run by the PP's Secretary General Dolores de Cospedal since last year's regional elections, has already implemented a plan to cut spending by 1.8 billion euros, saying that she will follow the PP-run region of Madrid and put management of the health system into the hands of the private sector, a move that the Catalan regional government is also planning to implement. Artur Mas says that he will divide health centers and hospitals across its three regions into 20 units that will be run by public-private partnerships.

Meanwhile, the deputy leader of the neighboring regional government of Valencia, José Ciscar, this month announced what he called "harsh measures" aimed at saving 1.05 billion euros. To do that, his plans include a tax hike, staff cuts and direct spending cuts.

It's clear that both the Socialist Party and the current administration are committed to reducing spending as fast as possible, an approach that has been criticized by many economists, particularly given its impact on public services.

"The austerity plans are being carried out irrationally. There is no cost-benefit analysis in the cuts; the only measure is the impact on the budget deficit. For example, before health services are cut, there has to be an evaluation of the effects in the short, medium, and long-terms," says Antón Costas, a professor of political economy at the University of Barcelona.

Francisco Longo, the head of the ESADE business school's Institute of Government and Public Administration, says that governments can make savings in many areas before turning to essential services like health and education.

"Regional administrations are cutting the salaries of some senior officials, but the real issue is the number of jobs in their own parties, many of them of no real purpose, for example in provincial councils," he says.

Costas also points out that regional governments should lead by example, particularly as regards the perception of widespread corruption and impunity from prosecution for wrong doing by politicians and members of the business community, or they risk undermining their political credibility.

"Governments are asking society to support these reforms, but how is that supposed to happen when people see financiers being let off, or when nothing is done when savings banks are run into the ground to pay for private pensions? This destroys public confidence," he says.