Uncertainty is worse

The prime minister believes that Brussels’ acceptance of the change in its proposal for Spain’s public deficit targets is an expression of confidence in his economic reforms. It is true that the EU has accepted a modification to the previous limit of 4.4 percent of GDP partly due to the positive reception that our European colleagues have given the reforms in Spain. But it is also true that the decision to demand five billion euros of further cuts worsens the chances of deeper recession for the Spanish economy over the next three quarters.

The fixing of the deficit ceiling was mistakenly seen as a way of gauging the situation with regard to Europe, but now the government is trying to minimize the importance of the new cuts. A more adequate option would have been to negotiate a new calendar for stability that delayed the three-percent target until 2015. The fact is that Brussels has changed a decision made by the Cabinet (this is, in essence, what the new target of 5.3 percent of GDP in place of 5.8 percent, is) and Prime Minister Rajoy has accepted a budgetary adjustment for 2012 of 35 billion euros.

The more skeptical economists say that during a recessionary phase, with a fall in GDP of 1.7 percent forecast over the current fiscal year, it will be impossible to get the deficit down from 8.5 percent of GDP, as it is now, to 5.8 percent or 5.3 percent. Either of the two objectives is practically impossible, unless there are to be some intense sessions of creative accounting; even less likely is the three-percent target for 2013. At this stage, 0.5 percentage points is not going to decide the outcome of the game. The relevant questions to ask after these plays are: What is the budget for the current year going to contain? And, is the planned correction to the deficit possible without raising taxes? The budget is imperative in order to give the regions and the local councils the institutional economic framework within which they can operate; even worse than the cuts is uncertainty. But there will be no budget announcements until after the Andalusian elections on March 25.

Only with tax rises (in particular value-added tax) does the deficit target for 2012 look plausible, because the recessive effects will require more cuts; without a rise in taxes the task is mathematically impossible. Finance Minister Cristóbal Montoro has already begun to change course with the announcement that “fiscal instruments” will be applied, “in a considered, balanced and socially just way that will not affect the most vulnerable.” The accumulation of adjectives, however, does not serve to make his intentions any clearer.

The game that was being played by the government of first hiding behind the European macroeconomic forecasts and then the revision of the deficit is over. If it is dragged out any longer, the trick will be there for all to see. Citizens want to know where the cuts will be made, and to know if the government has a cogent economic policy — one that has, of course, been agreed with the other European countries within the Eurogroup — in order to accelerate the recovery and create jobs.