EVERUBODY LIES: SPAIN WON’T MEET ITS DEFICIT TARGET

Last July, Eurozone finance ministers agreed to grant the Spanish Government one more year to reach a deficit target of 3%. Thus, the deficit in 2012 won’t have to exceed a 6’3% instead of the initially foreseen 4%. Nevertheless, precisely because of austerity policies imposed by European authorities and the IMF (and firmly supported by the Spanish cabinet) the deficit in 2012 will be notably higher as well as in 2013 and 2014. So, everybody lies or everybody seems to believe their own lies.

Public spending has been reduced: thousands of public employees have been fired or their salaries have been lowered, national health and education systems have suffered deep cuts and the budget of other policies has been reduced as R&D (-20%) or development cooperation (-72%). Only two main budgetary headlines increases: unemployment benefits (even when the coverage rate of unemployed people receiving benefits is lower than previous years) and the interest payment of the public debt. It’s remarkable that, for the first time in the budgetary history of Spain, the interest payment of the debt is higher than the wages of all public employees (state, regional and local administrations). So regarding to public expenditure requirements the Spanish government is doing its homework.

What about of incomes?  First of all, TVA and Personal Income Tax were raised in the last six months.  Nevertheless public incomes have abruptly fallen as consequence of austerity policies. Private consumption is in coma due to 25% of unemployment and lower salaries. For instance, sales of new cars have been fallen continuously for the last 27 months. Car sales are now 70% lower than before the onset of the crisis (they are even bellow of Moroccan levels). So the collection from TVA and Personal Income Tax is fallen. It is estimated that the Spanish Tax Administration has lost 70 bn € (7% of Spanish GDP) due to austerity policies.

Incomes from corporate income tax also are at a very low level due to the lack of economic activity. However, it’s worth underlying some aspects of those taxes. Nominal corporate taxes are around 20-25%, depending on the size of the firm, but real taxation rate –after deductions- is 11’4%. In other words, taxation on workers is much higher than capital one and real corporate taxation in Spain is lower than in Ireland. Furthermore, the Spanish government rejects to introduce property or inheritance taxes.

The conclusions are evident. First of all, the solution to budgetary problems is not in outcomes but in incomes and then, the crisis is being used to transfer employment incomes to capital incomes.

We are facing a peculiar kind of vicious circle. Radical austerity policies are implemented to reduce the public deficit but those policies avoid reducing the public deficit so new austerity policies are adopted. How long and how far this “liar’s game” will go? Meanwhile the countdown of the social time bomb is going on.