By Daniel Rodríguez Asensio, a Spanish economist and strategy consultant, who’s the founder and President of think tank Acción Liberal.
The moment of truth has arrived. In only a few weeks time, we will know whether the European Union is willing to unlock the 144 billion euro which Spanish PM Pedro Sánchez has been boasting about – while already spending some of it – since Summer last year or whether, on the contrary, the Spanish government’s lack of credibility and incompetence will be exposed to the international community.
It is clear that the Spanish public finances are in dire need of this European bailout and therefore, I can only hope that the 2,000 pages counting “recovery plan” which Spain submitted to the EU will be accepted, despite the fact that it is rife with freedom-killing proposals. The 144 billion euro Spain would get from the EU recovery fund will not be sufficient – something which I have explained here – given that it will only cover 25% of the Spanish government’s liquidity needs for the coming years, but it is necessary to avoid a default, something which would cause havoc.
Therefore, it should have been one of the government’s priorities to come up with a technically impeccable plan that enjoys sufficient parliamentary and administrative support, also in the light of the fact that the economic crisis that has only just begun.
Unfortunately, the government had other priorities, including euthanasia legislation and engaging in Madrid’s regional election campaign. This despite successive warnings from Brussels.
Therefore, I have serious doubts that these resources will ultimately be granted to Spain. Apart from that, however, there are also grave doubts that Spain’s “recovery, transformation and resilience plan” is viable or in line with what Spain actually needs.
Hereunder, I discuss the three main elements where the Spanish government is dropping the ball when it comes to its “recovery plan”:
- Increasing taxes still fails to generate economic growth
Spaniards have already suffered a brutal increase of their tax burden in 2021. In particular, they have been presented with new taxes, some of them are unheard of elsewhere, like the “Tobin Tax” and the “Google Tax”. Now, the Spanish government has promised Brussels to increase taxes even more.
To receive cash from the EU "recovery fund", the Spanish govt promises to Brussels to "raise taxes, eliminate tax benefits, improve tax collection and have more green taxes".
Is this meant to deliver economic recovery, @mjmonteroc?https://t.co/Blntg9mxv1
ht @daniro_asensio— Pieter Cleppe (@pietercleppe) May 5, 2021
Austerity plans that are based on tax hikes fail to generate economic growth. Economic literature has proven this. That’s even more the case for a plan without any link to economic reality and whose economic projections are unlikely to materialise, as Spain’s Independent Authority for Fiscal Responsibility (AIReF) has already warned, after investigating the plan.
Nevertheless, this is the direction the Spanish government is moving into, despite the fact also that the fiscal watchdog has estimated that the revenues of the government’s tax increases will be 50% lower than the government expects.
This is the case to such an extent that public revenues have fallen by -3.4% year-on-year in March, including a 12% drop in indirect taxation income. This includes VAT income, which is closely aligned with domestic demand, and has fallen with 20%.
When it comes to public finances, the Spanish Government is really trying to put up a smoke screen.
It’s hard to believe that the ruling socialist party, which came up with the model of making the use of transport infrastructure “free” – ultimately paid of course by everyone – is going to abandon this, so to get public finances back in order. At the beginning of his term, PM Sanchez eliminated some road tolls. It is unthinkable that he would now backtrack on this.
What he almost certainly will do instead is to scrap tax benefits for those filing jointly, something which would affect the middle and lower classes, because that’s where the real tax collection capacity is.
The government is mostly keen to be able to keep up their spending patterns.
According to the Institute of Economic Studies, the Spanish government could make potential efficiency savings amounting to 58 billion euro. The Independent Authority for Fiscal Responsibility (AIReF) has questioned 30 billion euro of spending, which includes 14 billion euro in subsidies where any kind of monitoring was lacking. Savings should really be possible, also given the finding by Savings Banks Foundation FUNCAS that only 30% of the spending hikes in in the government’s 2021 budget are related to social spending.
None of that has convinced the Spanish government to look at the potential of budget savings. Their priority on the contrary is to maintain a clientelist network, which secures its power, even if this at the expense of citizens.
- Looking at the electoral cycle, the expected tax income looks uncertain
PM Sánchez and his minions have promised Brussels to carry out the largest tax increase in Spanish history in 2022 and 2023. That is curious, considering that in legislature’s term will expire on 10 November 2023.
People do not like to pay taxes, as much as the interventionists and their allied media attempt to portray a picture of citizens delighted to pay taxes to finance public services. The ordinary citizen really only wants to pay the taxes needed to maintain a welfare state of a good quality.
Looking at how the governing socialist party has been wavering on admitting it intends to scrap income tax benefits for those filing jointly, one should be skeptical that the Spanish government will actually impose a tax bill of 90 billion euro, which amounts to around 2,000 euro per citizen, in the run-up to a general election.
Either PM Sánchez is lying to Spaniards, as he may be planning to bring the elections forward to this year, or he is lying to Brussels. In any case, the timing does not make sense and the Spanish government’s budget planning is therefore very doubtful.
Then I haven’t even discussed the fragile parliamentary balance, which will become even more tricky as the election date approaches. This will complicate the implementation of the plan which was submitted without consensus.
- Without proper structural reforms, the plan will fail to generate economic growth
PM Sánchez really started from the wrong basis with this plan. As a consequence, he has also come to the wrong conclusions.
First, Spain’s problem is not one of revenue, but one of expenditure. The difference between Spain’s tax burden and the EU’s average tax burden is only 2 percent, not 7, according to Spain’s Central Bank. This means that the structural target for revenues should only amount to 20 billion euro and that the bulk of the effort should be made on the side of government spending.
Furthermore, by stimulating economic activity and getting unemployment and productivity to the average level of the EU, the Spanish government would be more successful in raising those revenues than by taxing an increasingly poorer population, which is facing an economy with fewer jobs which is increasingly resembling a wasteland. However, the Spanish government’s plan lacks the structural reforms that Brussels has been requesting for years.
Secondly, there currently are hardly any analysts believing that this plan is going to work. It is enough to take a look at the estimates of the IMF or other analyses to see that Spain is going to continue to have one of Europe’s worst public deficits for the next few years. This to the extent that that the year where Spain will once again meet the criteria of the EU’s stability and growth pact – maximum 3% budget deficit and maximum 60% public debt – is not even in sight. Moreover, Spain has the largest “structural deficit” – the deficit independent of the economic cycle – in the whole EU.
Last but not least, there is the – growing – possibility that the current economic crisis morphs into a financial crisis. There are already organizations that are beginning to warn of this possibility, and Spain would be one of the most vulnerable countries.
In sum: Spanish PM Sánchez has submitted a document to Brussels that lacks the structural reforms that have been requested for years and which contains a budget planning that is rife with serious doubts and inconsistencies. Now Spain is facing the “stagflation” that some of us have been warning about since last year, while the government’s only response is marketing and propaganda.
This is unfortunate. Spain could be an example for the world, but it is on the way to becoming a model to avoid.
Originally published in Spanish by Libre Mercado
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