Does The 2019 Budget Benefit The Spanish Economy?

Does the 2019 Budget benefit the Spanish economy?It seems unlikely that the Spanish budget, if approved, meet the deficit target

Juan Carlos Martínez Lázaro in The Conversation | The destiny that awaits the 2019 budget remains uncertain. Although the government has sent them to the Congress to start their parliamentary processing, it is not clear they are going to be approved because of the need to count on the votes of the forces which carried Pedero Sanchez to the Moncloa. It will be especially difficult to secure the support of the Catalan separatist parties, even though there is a significant increase in investment in Catalonia, because they have conditioned their support on political or judicial concessions.

The Government points out that this budget has three objectives: to combat inequality, change strategically the economic model and control the public deficit. We will see. To fulfil the first objective, the budget includes the largest increase in social spending in memory, some 57%. Especially significant is the increase in pensions, which will again increase on the basis of the consumer price index (CPI), and in dependency spending, which increases almost 60%.

Change in the productive model?

More questionable is that this budget will be a tool for “driving productivity and strengthening solid growth”. The increase in some areas like investment in infrastructure or civilian R&D is notable. But one swallow does not a summer make. A budget does not increase productivity, or change a country’s economic model. Many more things would be needed to transform the Spanish productive model which, although it hurts us, remains the same as what we had before the crisis.

Lastly, this budget does not seen sufficient for controlling the public deficit, even though it will have to keep to the deficit target set by the PP of 1.3% of GDP rather than the 1.8% the Government would have preferred. To be able to square the Budget with a deficit target of 1.3%, with such a major expansion of social spending, the forecast of income has had to be inflated.

Indeed, it is hard to see how tax revenues can increase from some 210 billion euros in 2018 to more than 227 billion euros in 2019, despite the new taxes (the Google tax and the tax on financial transactions, which would bring in slightly more than 2 billion euros) and the increase in income, corporate and petrol taxes, fundamentally, which would amount to some 5.6 billion euros.

The rest of the increase in tax revenues trusts in greater economic activity, a greater fight against fraud, and, surprisingly, an accounting artifice that would allow 5 billion euros in VAT to be apportioned to this year that was not booked to 2017.

The largest public deficit in the EU

Will the budget, if it is approved, meet the deficit target? It seems unlikely, given that the new taxes will take time to be enter into effect and that the reduced economic activity which is expected (the Economics Ministry has just lowered the growth forecast to 2.2%) will make it difficult to increase tax revenues by 14%, as the government expects.

In this sense, the forecasts of the European Commission, the IMF and various local analysts place the public deficit above 2% in 2019, something which does not seem to matter to the Government, or those who support it.

Maintaining budgetary stability does not stop being something tiresome imposed on us by Brussels, but something in which our political class does not believe, which is why they do not put much effort into it. This is the only way of explaining why, as we enter the sixth year of growth, our public accounts still show a bulging imbalance, the largest of the 28 members of the EU in 2017.

The 2019 budget is very well designed from a political point of view, as it is a tool for prolonging the legislature.

The increases in social spending and the investment in Catalonia are the sweetners so that the Government’s parliamentary allies will support them and an excellent letter of presentation for its potential electorate. But unfortunately they will provoke an increase in the deficit and the public debt (even though that could reduce in relative terms), for which reason they will increase the vulnerability of the Spanish economy.