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A change of direction

The damage done by five years of crisis calls for another economic policy, backed by tax reform

After five years of deep recession, the damage done to Spanish society is heavy. The deep budget cuts in education, health and investment, plus the burgeoning growth of unemployment, have increased poverty and inequality, and gravely compromised the present lives of pensioners and the future of the young. Statistical data confirm a growing impoverishment of society, the spreading phenomenon of energy poverty, and the destruction of the possibilities of wealth generated by investment in research and development.

The present is bleak, the upcoming economic year offers no expectations of substantial improvement — though formally the actual recession is over — and the medium term shows us a Spanish labor market in a phase of very slow recovery, with precarious contractual conditions worse than those of 2008, which does not bode well for the rate of consumption.

The recession is not the only cause of all this. An important contributory factor behind the deterioration is our country’s economic policy — incoherent between 2008 and 2011, and ill-applied, when not contradictory and inept, from 2012 on. The facts show that the stability policy, implemented by the government of Mariano Rajoy at the cost of painful cutbacks in healthcare, education and other sacrifices, has not achieved the objective of reducing the public deficit to within the limits promised to the EU.

This is an objective that, according to the government’s economic team, was crucial in laying the groundwork for recovery. And public debt is still growing out of control. In 2014 it will surpass 100 percent of GDP. The government’s austerity policy has not mitigated the damage of the financial crisis; if the risk premium has fallen it is because the European Central Bank has demonstrated, in word and deed, its readiness to take action.

A difficult reform

The post-crisis social depression demands a different economic policy for 2014. It is still unknown whether the present government, perhaps embattled on too many fronts, is in any position to design such a policy and implement it. The decisive pillar of this new orientation can only be drastic fiscal reform, which would enable the state to increase its revenues and thus gain a margin for public investment and social expenditure.

This is by no means an easy reform, because it must address various objectives: it demands tough action against tax evasion, and must also promote saving (the only way to reduce debt). But the main guidelines are well enough known: reduce income tax, moderately reduce corporate tax (in exchange for the immediate suppression of the tax benefits that undermine revenues), and raise VAT to produce a new distribution in the structure of indirect taxation.

Profound fiscal reform is not the only prescription that the Spanish depression requires; but if properly implemented it may bolster public confidence in other necessary changes, such as the liberalization of the markets, and a new model of labor relations that would not be so punishing to consumption.

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