Little room for maneuver

If the macroeconomic outlook for 2014 and the broad parameters established in the draft state budget for next year presented on Friday already suggested how risky it would be to predict that the public accounts will foster a recovery in the economy next year, a more detailed inspection of the specific allocations contained in the budget confirm this first impression.

There are few surprises in a growth forecast of 0.7 percent and the continuation of austerity. The cutbacks in infrastructure spending, amounting to 7.2 percent, are concentrated mainly in Catalonia, Asturias and Murcia; social expenditure leaves little margin for other policies, the best example being the allocation for spending on unemployment benefits, which rises by more than 10 percent and confirms that the problems gripping the labor market will remain in place for at least five years. Pensions will grow at the bare minimum rate stipulated in the recent reform, and there will be small increases in outlays on education and some areas of culture, but deep cuts in others such as subsidies for the film industry.

What is most apparent in the public accounts is precisely the imprint of the crisis and its consequences — including an increase in outstanding public debt, which is set to rise to 99.8 percent of GDP — further complicating the stability policy the government is bent on. This implies, as already highlighted above, further cutbacks in public investment to levels last seen 25 years ago. The budget also projects an increase in tax revenues, which in theory are expected to rise by 1 percent. The tax hikes decided on in 2013 — particularly in personal income tax and value-added tax, as well as a long list of other levies — will remain in place next year. On the one hand, this big increase in the tax burden has failed to yield the expected results in reining in the public deficit and, on the other, reveals doubts on the government’s part about the effectiveness of spending cuts. In short, it restricts consumption and puts a cap on savings.

As for pensions, the government is proposing the legal minimum annual increase of 0.25 percent. This is not an actual freeze, but looks a great deal like one as it implies a loss of purchasing power of at least 1.25 percentage points. Nor does the Finance Ministry seem very convinced of the effectiveness of its proposals for reforming the state pension system as it has raised the maximum base for Social Security contributions by 5 percent. That is, it increases the already existing wide gap between those whose contributions help fund the state pension system and those who enjoy its benefits.

Since the budget for 2014 adheres more to reality than those of the previous two years, it would be bold to present it as a budget for recovery. Accepting the impact of the recession is inevitable, but active outlays in favor of employment and investment are still conspicuous by their absence. In this context, it is important to be aware of external weaknesses, ranging from the crises in Italy and Greece, which may yet raise the cost of debt and cause financial costs to soar, to a slowdown in emerging countries and the uncertainties of political paralysis in the United States — factors that operate against the smooth functioning of exports.