Pensions and political considerations

Rising prices in September have brought the average inflation rate, measured by the CPI, to 3.5 percent, an increase of eight-tenths of a percentage point in a single month. Inflation is not the Spanish economy’s main problem, but such a sharp rise in prices is good reason for the economic authorities to weigh up certain considerations. The most immediate of these is that Spanish companies have not, in their profit-and-loss accounts, absorbed any part of the tax hike; they have passed it almost entirely on to prices. The structure of Spanish commercial networks, which is poorly liberalized and with transformation costs that are often inappropriate for a market economy, has also contributed to an immoderate rise in the CPI.

The escalation of prices has a secondary, detrimental effect. Should the government decide to admit the loss of purchasing power among pensioners due to inflation, the CPI for September indicates that this admission, which ought to be calculated with the CPI for November, will cost the public coffers some five billion euros (in two years) for contributory pensions. Though it is disagreeable to say so, this cost is unacceptable. Just as in times of prosperity we must defend pension rises, in the present situation it would be counterproductive to do so. It would distort the allocation of resources, force additional cutbacks in other areas, and produce only minimal relief on the incomes of pensioners, who have been hard hit by other poorly explained decisions, such as co-payment on pharmaceuticals.

The government is handling this problem with airs of political astuteness. It has not yet said whether it will raise pensions, but the ambiguity in this case is ill-calculated; the public can clearly see that it is only a matter of not announcing the decision until after the Galician elections, when such a decision will have no electoral cost at all. But this style of management is no longer credible. On the contrary, it defines the government’s intentions as unclear, and suggests that they are aimed at concealing the consequences of the crisis.

Thus it would be a mistake to raise pensions in line with the CPI; just as it would be a mistake to authorize a one-percent hike in pensions for the year 2013. It was possible to implement an economic policy that would have minimized the impact of the recession on pensions or on other social costs; but this has not been the course chosen by the government. The one it has chosen demands austerity. It is not consistent, or even advisable, to present a stability program to the in which you accept containment of social spending (pensions and unemployment insurance, above all) within a given percentage of GDP, and then, for reasons of electoral advantage or fear of public opinion, to propose a rise in pensions, the cost of which would amount to a rise in spending. This is not the road to credibility — not in the eyes of the Spanish public nor in those of the EU.