A credible budget

When drawing up the 2013 budget, the government will be forced to make another complex series of painful cuts to public spending. A downward adjustment of some 25 billion euros is now pending, against the economic backdrop of a recession that, throughout next year, will remain intense (a one-percent contraction of GDP is likely).

The government’s budgetary policy is now at a critical moment. The most accurate estimates indicate that Spain will not meet its deficit-reduction objectives this year, with a high probability that it will stand at about seven percent of GDP; and this non-fulfillment will be poorly received among investors. The 2013 budget is a singular opportunity for the government to clarify its confused economic stability program until 2014, and to explain how it plans to carry out more cutbacks next year.

The difficulties in budgetary policy stem from two serious problems that the government has so far been unable to solve. The first is the stifling weight of interest on government debt, which in 2013 will be the largest single expense in the budget, ahead of expenditure on personnel. With a 38-billlion-euro financial burden to carry, the government will see any economic policy built around the budget simply canceled out, reducing economic policy to the thankless task of finding new areas in which to apply spending cutbacks.

But the second problem is even more prejudicial, if that is possible, to the credibility of Spanish budgetary policy. The Finance Ministry is considerably underestimating the effects the recession will have on public accounts. For example, it is obvious that its initial unemployment forecasts for 2013 are excessively optimistic. The rate of unemployment forecast for that year — 24.3 percent — has already been exceeded in the second quarter of this year, and can hardly be expected to fall in a recession. The fiscal pressure exerted by this higher level of unemployment invalidates the government’s stability plan.

Time for new strategies

In other words, the 2013 budget — which must not be subordinated to the demands of upcoming regional elections — will be unable to comply with stability demands. These are also handicapped by the probable non-fulfillment of the deficit-reduction objective for 2012, if new decisions on spending cutbacks are not promptly implemented. After the hike in value-added tax, there is little room for new tax rises — some special taxes, perhaps, but not much else.

It would appear to be the time for new strategies, ones that have so far been under-utilized. One of these would consist of setting aside the fiscal amnesty, which is clearly failing, and intensifying the fight against tax evasion. Another approach would be a reduction of the existing rebates and exemptions in the fiscal system, whose effectiveness is questionable.

The government needs to bring forward a new set of accounts, correcting the previous underestimation of the effects of the crisis on public revenue and expenditure. This is the precondition that has to be met if the budget is to be credible, in the eyes of the public, the markets and the EU authorities.