Now, we come to the Spanish budget. The austerity here is a lot more real than it is in the French budget. As I have been saying for a number of weeks, the goal of the Spanish government is to present an austerity budget that gets approval from the word go, so that should Spain need to be bailed out, it would do so without having additional measures forced on it. I think this makes a sovereign bailout more likely. I aslo think this was a purely political maneuver by Rajoy to allow him to say that he has been fiscally responsible. But as we see from the protests, that is not what will win the day politically in Spain.
In terms of actual substance, you have:
- Spending cuts. A spending reduction of 8.9% with numbers varying from a low of 4.2% to a high of 30% cuts to the agriculture and justice department budgets. The contrast to the French budget is striking here.
- Salary freeze. Civil servant salaries will be frozen for the third consecutive year.
- Taxes. A 3.8% increase in tax rates will take in a projected additional 4.7 billion euros – if the cuts don’t reduce demand and therefore revenue more than anticipated. There is also a special tax of 20% being levied on net lottery winnings in excess of 2,500 euros. I am not sure if these are additional levies or the first levies because lottery winnings are already taxed as ordinary income in other countries.
- Reforms. 43 bills are planed for introduction in the next six months to make significant reforms to labor laws and to deregulate sectors like utilities, energy and telecommunications. And Rajoy has the votes to get these through.
- Car scrap page scheme. On the stimulus side, there are a few perks like a car scrap page scheme that is supposed to kick back 2,000 euros to people who trade in a 12-year old car for a newer (more fuel efficient and better) one. The car price can’t be more than 25,000 euros before VAT. I see these programs as being of dubious value.
- Raiding pensions. Like the Irish before them, the Spanish are going to raid the public sector pension scheme in order to make ends meet. Argentina also raided its pension schemes earlier in the year. Apparently, the plan is still to increase pensions by 1% to prevent pensioners from losing too much purchasing power (and voting for another party). The pension plan has saved up over 69 billion euros since 1997, and ostensibly all of this is available to the Spanish government in order to finance itself before it must go cap in hand for a bailout. The Spanish government has already used 7.6 billion of these funds starting in July.
Olli Rehn has already said this is more than Brussels requested. So, the Spanish budget fast-tracks the country into bailout territory, which is where I see this heading. But the pension raid certainly forestalls this. I think it is a significant move in terms of Spain avoiding a sovereign bailout. Let’s watch where this heads in the next couple of months. Overall, Ireland is still the model for Spain as the banking sector stress tests bailouts, and bad bank prove and as the pension raid proves. Mentally, the Rajoy government sees these measures as necessary, with the goal being to end up where Ireland is rather than where Greece is.