By: Dr. Mike Campbell
On Friday, the Spanish government announced a raft of austerity measures which were designed to save an ambitious €27 billion this year. The aim is to push the public deficit back down towards the current EU target of 4.4% of GDP. Whilst Spain had initially agreed to attempt to meet this target, the government found that the deficit it had inherited from the previous administration was worse than they thought; coming in at 8.5% rather than the 6% figure they had been led to believe. After some haggling with the European Commission, the target reduction was increased from 5.8% to 5.3% and therefore the budget needed to be tougher than previously thought.
If Spain can credibly reduce the deficit, it will help to shore up investor confidence that the nation can honour its obligations and help to keep the cost of borrowing sustainable.
The raft of new measures includes an increase on taxation of larger businesses which is hoped to net €12.3 billion in increased revenue. Government departments need to live with an average reduction of 17% of their budgets and public sector wages will be frozen. However, state pensions will rise and unemployment benefits will remain untouched – a good thing for the nearly 25% of the workforce currently idle.
Income tax will rise by 1.9% and there will be a hike in utility costs with gas and electricity going up by 5 and 7% respectively.
The deputy Prime Minister, Soraya Saenz de Santamaria summed up the position: "Our obligation towards Spanish people and the rest of the EU citizens is to get public accounts into shape, not at any cost, but with measures that support those citizens who need it the most and not paralysing a possible recovery or job creation”. There is a fine line between making necessary spending cuts and stifling economic growth which would bring in greater revenue – hopefully Spain has judged this one correctly.