Government presents 2019 budget but cross-party support not guaranteed

The plans would see the biggest rise in spending since 2010, but the weak position of Prime Minister Pedro Sánchez and instability in Catalonia mean they may not prosper

Three months later than was scheduled, the 2019 budget was filed this morning in Spain’s Congress by the finance minister, María Jesús Montero. The plans include the biggest rise in public spending since 2010, with more funds destined to social areas.

The intention of Socialist Party (PSOE) Prime Minster Pedro Sánchez with the budget is to heal the wounds left behind by the dramatic global financial crisis, which began a decade ago and hit Spain particularly hard, given that it coincided with the bursting of a real estate bubble.

The intention of Prime Minster Sánchez is to heal the wounds left behind by the dramatic global financial crisis

According to the government plans, spending on social care, housing and investments will rise more than 40%. They also include a wide-ranging social program with a plan to combat child poverty and the inclusion of assistance for those families who are most in need.

In total, the state will spend more than €345 billion, a 5.3% rise on last year’s figure.

The budget plan should have been finalized by the end of last September, as is set out by the Constitution. But the ongoing political instability in Catalonia – which is still immersed in an independence drive that has seen several politicians placed behind bars ahead of trial for their role in the pro-secession movement – is among the reasons for their delay.

The key issue that has slowed the process, however, is the political weakness of Sánchez himself

The key issue that has slowed the process, however, is the political weakness of Sánchez himself. The PSOE politician came to power in June after winning a vote of no-confidence in Congress against his predecessor, Mariano Rajoy of the conservative Popular Party (PP). Sánchez only counts on 84 seats out of a total of 350, in a lower house where 176 are needed for a majority, meaning that he is dependent on the support of parties such as left-wing Unidos-Podemos, and nationalist parties including those that want an independent Catalonia, to get things done.

Despite the increase in spending, a lot of these funds will have to go to topping up Spain’s pension pot (up 6% to €153 billion, almost half of total resources), paying the salaries of civil servants (up 3.9%, to €23 billion), and paying interest on public debt (up to €31 billion). Add to this the funds that will be transferred to Spain’s regions, local councils and other public companies (€261 billion, up 6.3%), and that leaves the government with little room for maneuver.

The Finance Ministry is forecasting record tax receipts for the year, of more than €227 billion – up 9.5% on the previous year. Around half of this increase will be thanks to an improvement in the economic cycle: the Spanish economy is expected to continue to grow (by 2.2%), and a rise in prices will also boost tax income. Rate rises will also bring in an extra €5.65 billion. These include higher income tax for those who earn more than €140,000 a year, and a rise in company taxes for firms whose annual revenue exceeds more than €20 million. These measures will only affect 0.5% of taxpayers and 0.7% of companies.

The Finance Ministry is forecasting record tax receipts for the year, of more than €227 billion

Montero has also included two new taxes: one that will be levied on digital activity, known as the “Google tax,” and one that will cover financial transactions, and will be applied to trading in stocks of large firms.

The future of this budget plan, however, is far from secure, given that Sánchez lacks the support of his main partner in government, Unidos Podemos, which says that it has found 11 points on which the government has deviated from the commitments it made last October. Sánchez is currently involved, meanwhile, in ongoing and frenetic negotiations with the parties that support Catalan independence.

As part of these talks, the government has committed to spending 18% of the funds allocated to infrastructure in Catalonia. That will comply with what is set out in the northeastern Spanish region’s governing statute, which stipulates that Catalonia should receive investment equivalent to its weighting in the national economy.

English version by Simon Hunter.

A loan for the pension pot

The 2019 budget will once again include a loan from the Finance Ministry to the Social Security system in order to be able to pay pensions. Sources from the Labor Ministry have revealed that the amount will be €15 billion, which is equivalent to 1.2% of GDP. The amount is similar to the loan doled out in 2018, and higher than the €10 billion lent in 2017.

The loans will cover the shortfall between contributions and the extra payments to pensioners that are made in the summer and at Christmas, and will avoid the pension Reserve Fund from running dry.

Since the year 2011, the Social Security system has been faced with a growing deficit that has been covered by the use of funds that were saved up during the boom years in Spain. But in 2017, that option was no longer available, given that those funds had run out, and the government of the time – run by the conservative Popular Party (PP) did not want to assume the political cost of leaving the country’s pension fund empty.

The current labor minister, Magdalena Valerio, is also unwilling to be the person to oversee such an occurrence, and has resorted to the Reserve Fund.

There are currently €5 billion left, but this is not enough to even cover one month of pension payments. “I would not like to go down in history as the minister who left the piggy bank empty,” Valerio admitted last November.

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