Can Mariano Rajoy Save Spain From Its Financial Crisis?

on September 28 2012 8:13 AM

The Spanish government passed a budget for 2013 that will not only deepen ongoing austerity measures, but increase overall spending due to a spike in borrowing costs.

The program envisions spending cuts of some €20 billion in order to reduce the deficit to 3.8 percent of GDP (from an estimated 6.3 percent this year). The budget also forecasts a contraction in GDP by 0.5 percent, although some Spanish economists believe even that figure is overly optimistic.

Only state pensions, school grants and interest payments on government debt will increase, reported the El Pais newspaper of Madrid.

In fact, interest payments are set to leap by 33 percent to about €38.6 billion due to the rising deficit.

Total spending will climb by 5.6 percent to about €170 billion, while total revenues are expected to edge up 2.7 percent to €175 billion. Almost two-thirds (63 percent) of spending will focus on social services.

But spending at government ministries will be cut by almost 9 percent (in order to save almost €4 billion), while the salaries of public sector employees will remain frozen for the third straight year.

Spain’s cultural and arts programs (renowned across the world) will especially suffer from spending reductions.

Deputy Prime Minister Soraya Sáenz de Santamaría told reporters in Madrid this is a “budget for times of crisis to get us out of the crisis.”

The budget also envisions €4.375 billion in taxes, including an astounding 20 percent hit on lottery winnings in excess of €2500.

Finance Minister Cristóbal Montoro commented: “The budget aims to dispel doubts about the sustainability of Spain’s debt.”

The opposition Socialist condemned the budget, saying the new conservative government of Prime Minister Mariano Rajoy had “not learned from the mistake” of intensifying austerity during a period of economic weakness.

Inmaculada Rodríguez Piñero, a Socialist spokesman, characterized the proposal as a “depression budget” which will fail to reduce unemployment (now running at some 25 percent) and not ease the deficit.

Naturally, the EU’s Economic Affairs Commissioner Olli Rehn praised the new budget.

"I particularly welcome the ambitious plans to establish an independent fiscal council, to further liberalize professional services, and to effectively reduce the fragmentation of the internal market in Spain," he said in a statement.

The Rajoy government will send the budget to Congress this weekend for approval by October 1.

Laura Gonzalez, an assistant professor of finance and business economics at Fordham University in New York, placed the blame on Spain’s current economic crisis on” irresponsible short-term political decisions made by both national parties, conservative and liberal, as well as by speculators who have been heavily betting against the euro and the EU through Spain.”

Gonzalez also noted that while violence erupted in Madrid between police and demonstrators protesting the budget, Rajoy chose to spoke about Gibraltar while attending the United Nations general assembly.

“The Spanish middle class is dealing with 20 percent cost increases in such basics as back-to-school, groceries, utilities and transportation,” she added.

“One politician's suggestion for parents: just recycle books more. All this with youth unemployment at 50 percent and expectations that budget cuts will continue through the year 2024.”

In addition, she lamented that during his campaign for office, Rajoy promised an economic recovery and lower taxes.

“But a fiscal amnesty was passed, taxes that hurt mostly the middle class were passed, budget cuts in education and health care, which also badly hurt middle class, were passed,” she noted.

“But what about investment and job growth strategies? Where was the plan? Nobody knows, in Spain or abroad what Rajoy's strategy is...  and wonder if there is one, which has lead to the social outrage.”

Gonzalez said she thinks that an increasing number of Spaniards -- even those who do not demonstrate in public protests – do not think Rajoy can get Spain out the crisis.

“It is time for Spain to negotiate support from the European Union,” she added.

Spaniards need it, deserve it. Enough time has passed and leadership needs to come from abroad.”

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