Spain released its austerity budget today, and it focuses on cuts to social spending much more than any tax increases.
Government ministries saw their budgets slashed by 8.9 percent for next year, as Prime Minister Mariano Rajoy’s battle to reduce one of the euro zone’s biggest deficits was made harder by weak tax revenues in a prolonged recession.
However, the conservative government said tax revenue would be higher in 2012 than it had been originally budgeted for and would grow 3.8 percent next year from this year.
Spending cuts would be worth 0.77 percent of gross domestic product in 2013, while adjustment in revenue would be worth 0.56 percent of GDP.
“This is a crisis budget aimed at emerging from the crisis … In this budget there is a larger adjustment of spending than revenue,” Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.
This cuts spending overall by €40 billion in 2013. Public sector pay will be frozen for a third straight year. In addition, €3.1 billion will be taken out of a reserve fund for the Spanish version of Social Security, to “cover some treasury needs,” which may increase pensions in the short term. One of the big taxes is to lottery winnings. The other big change is a monitor for regional government spending, to ensure that they hit these targets. Catalunya, the region attempting to secede from Spain, will not take kindly to that.
The budget is seen as a proxy for a conditions-based bailout from Europe. This can be seen in particular with the 43 “economic reforms,” including specific sectors like energy, inside the document. By imposing these austerity measures and reforms “independently,” Spain can claim that they were not forced into conditions by Eurozone leaders, and instead received their bailout without strings attached. That’s the political play Prime Minister Mariano Rajoy wants to make, anyway.
On policy grounds, more austerity for a country in the midst of 24% unemployment is indefensible. But in the upside-down world of the stock market, they fell yesterday, when the prospects of a Spanish bailout were in peril, and rose today, on the announcement of the austerity budget. Spanish borrowing costs also rose yesterday above 6%, with the bond vigilantes exerting pressure on the country to abide by bailout terms; the yields dropped below 6% today. So Spain did have a lot to contend with from the markets.
Much more on the Spanish budget here. They do include a “cash for clunkers” type scheme, known in Europe as scrappage.
Meanwhile, the ruling coalition in Greece reached agreement on an austerity program of their own. So if you thought that riots outside Parliaments in the two countries would stop the austerity train from rolling on, think again.