Spanish deficit cuts may slow economic recovery

10:21, May 23, 2010      

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Spain has prioritized the deficit reduction in order to bring solvency back into Spanish public finances, but the austerity plan approved earlier this week may slow a still nascent economic recovery in the country.

Public workers expect to see their salaries reduced and other unpopular measures, such as tax increases, were also being considered. Those measures may well lead to general strikes in the weeks ahead.

GDP FORECASTS LOWERED

The austere adjustment of public spending resulted in a lowering of the government's growth projections for 2011 from 1.8 percent to 1.3 percent.

Many, including institution economists, have warned that Spain may return to negative growth after the implementation of the adjustment plan and the increase in value added tax planned for July.

Finance Minister Elena Salgado said, however, that the revised forecasts were "very conservative."

The National Statistics Institute confirmed earlier this week that Spain's GDP grew 0.1 percent in the first quarter, the first positive growth after almost two years of contraction. The improvement was reflected primarily in investment and in consumer spending, but the recovery is still far from consolidated.

AUSTERITY PLAN

The Spanish government opted for a deficit reduction, as demanded by the European Union's Growth and Stability Pact. The EU has threatened sanctions on those countries that violate the terms of the pact.

It marked a U-turn in the social policy of Prime Minister Jose Luis Rodriguez Zapatero. Public wages were expected to be cut by 5 percent on average, which is ambitious even though the deficit cuts will be progressive in relation to income levels.

In June, senior government officials will see their wages fall between 7 and 11 per cent, while lower-paid officials will suffer a 0.56 percent salary reduction. Wages of all public workers will be frozen in 2011.

The fiscal adjustments approved Thursday also included a 6 billion euro reduction in public spending until 2013, a freeze in pensions (except minimum pensions) in 2011, the cancellation of maternity aid known as "baby-cheque," the elimination of retroactive dependency aid, and a substantial slash in the pharmaceutical bill.

Overall, the plans will save the government 15.25 billion euros in two years. The government was hoping that this would help reduce its deficit -- the third largest in the euro zone -- from the current 11.2 percent of the gross domestic product to 6 percent by 2011.

TAX INCREASE

The Spanish government fiscal policy seemed clear enough on spending, but not so on income. It is contemplating a tax increase for those with higher incomes.

For now, however, Zapatero has said that the tax reform will take place "in due course" when the government "thinks appropriate," and that it will only affect the wealthy but not the middle classes.

Salgado said the tax hike for the rich will be "temporary" and not "imminent," adding that the increase considered will be "very specialized" and not affect the GDP growth estimates.

Rumors and reports on the tax increase soon prompted criticism from the Popular Party (PP). The main opposition party accused the government of "fiscal voracity."

"A crisis has never been solved by increasing taxes, by damaging the middle class and by practicing easy populism," said Maria Dolores de Cospedal, secretary general of the Popular Party.

Other political parties also criticized the planned adjustments, particularly for the lack of coherence in their implementation.

POSSIBLE GENERAL STRIKE

The General Union of Woerkers (UGT) and the Comisiones Obreras (CCOO) have delayed a public workers strike from June 2 to June 8. Nevertheless, a general strike seems increasingly likely.

CCOO head Ignacio Fernandez Toxo said earlier this week that the union "is working from now as if this country will see a general strike," and that a decision was pending depending on whether the government was ready to reverse public cuts that have "perverse social effects."

With unemployment already at 20 percent, the adjustments will also carry high political costs for Zapatero. A recent survey showed the PP has doubled its advantage in voters' preferences over the Spanish Socialist Party (PSOE). The PSOE, without a majority, may find it hard to gather the necessary support to see its reforms through parliament.

The diverse levels of fiscal autonomy of Spain's regional governments and the different political parties involved will make it more complicated for the plan to tackle fiscal deficits.

In 2009, the deficit of Spain's 17 autonomous regions was 2.2 percent of their GDP. According to official estimates, it is expected to increase to 3.2 per cent in 2010, and to 4.2 per cent by 2011.

Source:Xinhua

(Editor:黄蓓蓓)

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