Spain: Austerity Stings and It Is Just Starting

March 31st, 2012
in econ_news

Econintersect:  Spain has enacted a new budget which cuts government spending by nearly 17% and raises taxes.  The cuts amount to 2.5% of the spain-flagSMALLcountry’s economic output.  At the same time taxes are being raised in what the government says will amount to €12.3 billion, which will take another 1.1% of economic output, if it is raises what the government estimates.  The tax raises are primarily in corporate and personal income taxes.  These moves are being made in an effort to meet EU demands for the 2012 deficit to be held under 5.3% of GDP.  This came after 2011 saw a deficit reach 8.5% of GPD, far above the target of 6%.  (See GEI News, 13 March).  There is considerable skepticism that the budget just enacted can actually come close to achieving the 5.3% objective.

Follow up:

Going into the cuts and tax increases, Spain is already staggering with an economic collapse. From GEI News:

It remains to be seen how the country will react to the reality of austerity, with the unemployment rate over 22% and expected to go higher.  Both Spain and Greece are running unemployment rates for the under-25 population in excess of 50%, more than double the EU average.

The unemployed and the additional soon to be unemployed are not accepting the additional economic slowdowns meekly. Thursday (29 March) as many as 1 million protesters demonstrated across the country. The exact number differs depending on whether you talk to union leaders or police but one number was known precisely: Electricity consumption was 17% below normal for the day suggesting a major impact on industries. (From The Guardian)

The following Reuters video summarizes the new budget and shows some demonstration footage:

spain-austerity-and-demonstartions-march-30-2012-video

There may be more cuts coming.  From the BBC:

Javier Diaz Gimenez, professor of economics at IESE Business School in Madrid, said: "This [budget] seems to be non-credible.

"They will not be making the 5.3% target agreed with Brussels, because the cuts are insufficient given the growth forecast," he told BBC News.

This could mean further cuts are needed before long.

"I suspect that the government could be forced to implement further austerity measures later this year, with lingering economic downturn set to place additional strains on an already perilous budget deficit reduction plan," said Raj Badiani, an economist at IHS Global Insight.

The main risk is that the government's tax revenue projections for 2012 look too optimistic," he said.

John Lounsbury

 

Sources:

Spain budget:  Cuts to total 27 bn euros this year (BBC, 30 March 2012)

As Greece Staggers, EU Puts Spain in the Crosshairs (GEI News, 13 March 2012)

Spain’s general strike shows first signs of rebellion against austerity (Giles Tremlett, The Guardian, 29 March 2012)









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