Though the economic policy of the Spanish government since it took power late in 2011 has been principally aimed at recovering Spain’s financial stability — to which end it is necessary to reduce public deficit and debt, by means of substantial cutbacks in the welfare state — these fiscal achievements have so far been insufficient. The government was unable to comply with its 2012 deficit-reduction objective, and it is not clear if it will do so this year. Meanwhile, public debt goes on growing, so much so that in September it reached a new high (954.863 billion, or 94.2 percent of GDP).
In recent weeks, the end of technical recession, the likelihood that in 2014 the Spanish economy will recover a modest rate of growth, and the tranquillity of the markets have all combined to relegate the difficulty in complying with the stability objectives agreed upon with the EU to the background.
But the European Commission has again highlighted the issue of deficit and debt. In its analysis of euro-zone budgets, the Commission draws attention to Spain’s public accounts, believing there to be a risk that Spain will fail to comply with the deficit objective in 2014, and calling for new budget adjustments extending to 2016. It recommends the implementation of further advances in terms of structural reforms (pensions, new changes in labor laws). But while the reference to reforms is generic, the perception of budgetary risks is very concrete. According to its calculations, Spain has to make an additional adjustment effort amounting to 35 billion euros.
The examination Brussels has made of Spanish public accounts places the government in a dilemma that is not new, but is, however, peremptory. If its intention is to comply with the deficit objectives, it will have to make this 35-billion adjustment in the form of new cutbacks on spending and higher taxes. The economy minister’s statement that the demand made by Brussels does not compromise the tax cuts promised for 2015 must be put in quarantine, at least for the moment; unless the government should opt for non-compliance with the deficit objectives, or for laying the whole weight of adjustment under the spending heading — options that do not seem to be easily viable.
An adjustment of a further 35 billion may put a brake on the incipient and modest growth that has been beginning to raise its head since the technical end to recession. If the adjustments demanded for 2014 (around 2.5 billion) are implemented, the government’s growth forecast (0.7 percent) is unlikely to take place. To simply assert that further cutbacks are not necessary to comply with the deficit objectives for next year amounts to denying reality; or, what is worse, to saying one thing in Brussels and another in Madrid.
A firm economic policy has to be decided: either you accept the consequences of the adjustment commitments, or you declare that the deficit objective is only a secondary factor in terms of financial stability. After all, economic growth does generate stability. But in any case, we are looking at a dilemma in which the government must decide which course to take.