Spain: Austerity Increases Deficit so Taxes Will Be Raised

Econintersect:  The new conservative government in Spain will cut spending by almost € 9 billion and raise taxes on property and higher incomes but is still warning that the deficit will be higher than expected.  The deficit under the Socialist government which was voted out this past fall had cut from more than 11% of GDP in 2009 to 9.2% in 2010 and is still expected to be 8% of GDP in 2011.  The official target is 6%.  New Prime Minister Mariano Rajoy wants the deficit to come down to 4.4% of GDP.  However, the Bank of Spain reported last week that the county’s economy is worsening.  According to reports in The Telegraph, Spain probably experienced a contracting economy in the fourth quarter and further contraction is expected in Q1 2012.  So business is contracting, the government is cutting expenditures and taxes are going up.  This is a plan?

The outlook is not good. From AdvisorOne:

Bloomberg reported that Spain’s deficit will hit 8% of GDP for 2011–twice the size of Italy’s predicted deficit and four times that of Germany–with, according to spokeswoman Soraya Saenz de Santamaria, tax increases that will total 6 billion euros and spending that will be slashed by 8.9 billion euros.

However, such tight austerity measures could ruin any chance Rajoy has to help his country’s economy grow. The unemployment rate is currently 22%, the highest in Europe, and with such severe spending cuts the likelihood that Spain can grow its economy out of trouble is negligible.

Although Rajoy came to power, with the largest parliamentary majority in 30 years, on a wave of discontent that swept former Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party from power in November, the shine may have worn off as taxes rise on everything from income to interest on savings and expensive homes, as civil servants see their pay frozen and those collecting pensions see a paltry 1% increase. Still, Spain will continue its 400 euro a month unemployment benefit, something Spaniards cling to with almost one out of every four people out of work.

Some economists are shaking their heads over the course of events. From Reuters (Yahoo News) on Econintersect News Europe newspaper page:

“This is a strong shock. I didn’t expect this kind of deficit increase. How can we achieve the objective using personal income taxes and capital taxes? This means making the recession much worse,” economist at Barcelona ESADE university Robert Tornabell.

Such opinions are not dissuading the government, however. From another article on the Econintersect News Europe newspaper page (AP via Yahoo News):

“This is the beginning of the beginning,” government spokeswoman Soraya Saenz de Santamaria said.

She said more reforms and austerity will come in 2012.

Sources: The Telegraph, AdvisorOne, Reuters via Yahoo News, AP via Yahoo News and Econintersect News Europe