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A budget of clearly depressive effects

Fiscal adjustment in 2012 is an immediate need, but so is a strategy for reactivating the economy

Almost all the details of the 2012 state budget released on Tuesday confirm the government’s aim of concentrating its economic policy exclusively on meeting the deficit reduction objective set by the EU (5.3 percent of GDP), while forgetting, perhaps only circumstantially, any attempt to revive the economy. The budget crudely reflects the situation of a public sector that has been losing its margin for maneuver since 2009. The picture is grim: financing for research falls by 34 percent, investment in infrastructure falls to half of what it was in 2010, social expenditure plunges (money for employment policies reduced by 21 percent), while scholarships, for example, have fared even worse.

The budget is a depressive one, reflecting the anguished mood of the Spanish economy. It confirms, too that governments tend to cut without much finesse, being unable or unwilling to operate surgically, and preferring blows of the hatchet. Social assistance, culture and much of the aid for education have been gravely affected. Also disappearing, just like that, are the investment commitments enshrined in regional statutes. Yet these public accounts pose immediate problems. The first is of a practical order. In prudent terms, it seems unlikely that this budget can reduce the deficit by three percentage points of GDP (unless through creative accounting). In spite of the blessings pronounced by the EU, which sound more like cheerleaders’ cries than well-founded calculations, the adjustment message expressed in the budget loses impact, owing to the absence of a credible hike in taxes (VAT) and to a recession that will go on at least through the next five quarters.

The prime minister has announced the budget cut in terms of an ultimatum: “The adjustment is the only way to avoid a bailout.” If what Rajoy fears is a bailout such as that of Greece, Ireland or Portugal, he must notice that, given the complex situation of the world economy and the financial markets, budgetary austerity is not a sufficient condition for avoiding it. The line that separates an austerity policy from intervention is called capacity for economic growth. The new budget reflects a logical concern with meeting the deficit objective, but implies an additional 0.3 percent contraction of GDP. That is, instead of the officially forecast 1.7 percent contraction, it will probably exceed 2 percent this year.

Crisis experience shows that the financial markets, even if calmed by the flood of liquidity that falls due in 2015, firstly demand budget stability, but soon argue that incapacity for growth impedes the payment of debts. The remedy becomes worse than the disease. So it is desirable to promptly dispel the essential doubt about the current economic policy: has the government a plan to restore activity and employment? If a 3-point adjustment is hard to achieve in 2012, and deepens the recession, the additional one in 2013 will prolong the crossing of the desert. Adjustment is an immediate need, but so is economic reactivation — even if it does mean a tax hike.


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