Unanswered questions

The press conference held by the ministers for finance and economy, Cristóbal Montoro and Luis de Guindos, after Thursday’s Cabinet meeting which approved the state budget for 2013 did not dispel the serious doubts that exist regarding budgetary stability for this year and the next.

De Guindos announced that an economic reform program to boost competitiveness would be forthcoming over the next few months, but went no further. The lingering doubts over the budget stem from the government’s obvious underestimation of the impact of the crisis on Spain’s public accounts and the gap between the adjustment that will be needed to bring the deficit down to 4.5 percent of GDP in 2013 and the measures regarding cutbacks and income included in the draft budget.

The underestimation of the crisis’ impact is evident in the calculation of a 0.5-percent contraction in the economy, a “gentle recession” as Montoro put it. It is more than likely that the real result is a contraction of one percent, meaning that the forecasts for employment and income from taxation — which are already barely realistic even based on the optimistic 0-5-percent figure — will simply not stack up at all. Indeed, the first unresolved question, which would condition budgetary strategy and the negotiations with the European Commission, is whether the final deficit figure for this year will meet the target figure of 6.3 percent of GDP.

The problem for the Finance Ministry is that while the reduction in spending can just about be planned, expected economic output and the prospects for government income remain extremely shaky due to the ongoing recession, the cuts in public spending and a situation in which room for maneuver in fiscal policy is almost exhausted.

The 2013 budget also reflects a devastating fact: borrowing costs will rise next year by 10 billion euros to reach a total of 38 billion. This is the measure of mistrust on the part of the investment community as regards Spain’s debt and effectively blocks the potential for any domestic stimulus policies. But there seems to be some room for political calculation, notably in the decision to raise pensions, despite the fact that total spending on social subsidies must be kept down to 15.9 percent of GDP. It was also announced that the government will dip into the Social Security reserve fund in order to meet these spending obligations.

An eye on elections

This would not seem to be a prudent course of action and, in any case, serves to confirm that the government’s commitment to budgetary stability is subjugated to electoral interests in Galicia. One could almost say the same about the fact that public servants’ salaries have again been frozen, while the Christmas bonus is to be restored in 2013. A better handling of the crisis might have made cuts to pensions and state salaries avoidable, but once that path has been chosen, it should be followed with some kind of coherence.

The paucity of information offered by the government on Thursday will not have been sufficient to reassure either citizens or the markets. Maybe the response will be more positive when the measures are outlined in full. But what we have seen so far suggests that the adjustment policies have little chance of success and that there is no sign whatsoever of a recovery strategy.