The thesis is reasonable and well-known: greater growth, lower deficit. But what happened in 2015 seems to corroborate another idea: a larger deficit (-5%) fuels the biggest growth in Europe (3.2%). So the government unilaterally raises the 2016 deficit target from 2.8% to 3.6%, while Brussels is going for 3.9%.
In the recently ended first quarter, Spain’s GDP continued to grow,undaunted, at a cruising speed of 3.4% annually. If we describe expansive monetary policy as Keynesian, as well as a public deficit financed at very low interest rates, is that not what’s happening in Spain? Don’t we have an excessive public deficit, which weighs heavily on the rest of the economy?
Some Keynesian economists would be enthusiastic. GDP is growing more than debt, which is a sign that the Keynesian multiplier exists and and is greater than 1 (every increase in public spending is converted into a greater rise in GDP).
That said, there are reasons to be dissatisfied. The rise in Public Administrations’ consumption, thanks to the uncontrolled spending of the autonomous regions, is not the best guarantee for talking up this type of policy. Although for the time being it is on a lesser scale, the autonomous regions have fallen back into the weaknesses which caused so much damage in the pre-crisis period, of financing an increase in demand with debt which, today, has a minimum financial cost thanks to the ECB’s quantative easing policy
The Public Administration sector is the only one which continues to obtain bank financing, while the market or private economy is still facing funding problems. What is serious is that the financing does not come directly from the autonomous community in question, but via the central government, which is the only existing issuer.
In other words, if the intention had been to establish a Keynesian policy, an efficient monetary-fiscal policy mix, the source of financing as well as the decision on spending would have come from the same adminstrative level. At least to avoid falling into Spain’s public adminstrations’ main sin of duplicating expenditure.
There is a clear bias in favour of the Public Adminstrations in terms of capacity and financing costs, which to a great degree blocks the tranmission canal which a Keynesian policy tries to establish, that of public spending driving private spending, particularly private investment via the multiplier.
But the first quarter data shows that this canal has been blocked off, and it is public spending and employment which is maintaining demand. This does not augur a soft landing when the EU is demanding that the deficit gets back on track: the contraction of this deficit, via tax rises and spending cuts, will take with it a part of the demand which, for the time being, has not hitched up to the market economy.
Late? Or Early?
In summary, the public deficit, originating almost exclusively with the autonomous regions, has contributed to creating a postive atmosphere for consumption, but it can’t be said that all this is an example of successful Keynesian policy. It’s more like an illusion which has not been transferred on to the market sector, which is showing signs of cooling off. Sooner or later, the EU will demand that this deficit deviation is corrected, which will mean a direct contraction of almost 1% in GDP, plus the spillover effect on the private economy
This leads us to ask: does Spain have the ideal institutions to implement a monetary-Keynesian type policy if the circumstances require this? Spreading out the decisions on spending, difficult to correct in the short term, casts doubt over the effectiveness of the canals this policy uses. Furthermore, a Keynesian policy is not just a mechanism to increase one item of spending to pull the rest along. It’s a policy to reestablish private investors’ confidence, not a model for substituting the private sector with the public sector. To decide on such a policy direction, the first thing that is needed is a healthy banking system, flexible to stimulus. It also requires a close collaboration between private companies and the state, and the latter’s role is to prioritise and orientate private expectations, not take the initiative. Spain has delegated almost all of its stabilising influences with Europe, and the dismemberment of what’s been left here only guarantees uncontrolled squandering.