Spain’s Mantra On Public Finances: Adjust Spending To Income

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The figures in Spain are stubborn and worrying. Public debt will exceed 100% of GDP in 2016 and the deficit is not keeping pace with commited goals. So Spain’s public finances are a potential source of future instability, which the country cannot permit given that its external debt is close to 170% of GDP.

According to Intermoney analysts, we have to work on the theory that the ECB effect “will not last for ever” and that crises “form part of the economic cycle”. In other words, actions need to be taken based on a long-term outlook. And from the point of view of public finances, this implies implementing unpopular measures in the area of income and spending.

The way forward is to comply with the commitments made to Brussels and achieve a deficit of 0.3% in 2018, leaving room for manoeuvre in the future and, above all, instilling confidence amongst our creditors. We should not discount the fact that the Treasury will finance itself for years at an average rate of 0.941%, or that the average interest rate on the debt in circulation will be 3.087% as it was in January. Interest payments will continue to be a heavy burden: these will amount to €33.490 billion, a little over 3% of GDP, according to the 2016 Budget.

There should be no delay in making the adjustments, taking action on two fronts: moderate tax rises and limited spending. In the first area, the figures show there is room for improvement, given that public revenues account for 38% of GDP compared with 46% in the Eurozone and the maximum level of 55% in Finland. The extent of the black economy and tax fraud partly explain this situation. But we also have to take into account the corporate tax agreements within the EU, or the huge gap in Spain between nominal and real tax rates due to bonuses and deductions.

The solution to this problem involves establishing a tax scheme for citizens which is more efficient and easier to understand. Its ultimate goal should be to (partially) reduce the gap in tax revenues with respect to our closest neighbours. In 2014, these revenues accounted for 21.7% of GDP in Spain compared with 26.4% in the EU. So a gradual improvement needs to be made in this area to strengthen the public finances.

The other problem for public finances in the short, medium and long-term is spending. Intermoney highlights that the comparision with the EMU (49% of GDP) and the EU (47%) is favourable for Spain, with a more moderate figure of 43%. But that doesn’t mean we should maintain current levels.

“Against this backdrop of extremely high public debt, we should keep the following in mind: Spain’s spending should be adapted to the country’s ability to generate income.”

In certain areas, social demands require the Public Administrations to adapt the services they provide and it would be inappropriate to defend increasing their staff levels as the only solution.

As a result of the bureacratic mechanism, ‘the Adminstration works for the Adminstration,’ running away from the necessary simplification of many processes, while resisting a devastating reality: new technologies reduce the need for adminstrative jobs.

It would be necessary to re-organise the jobs of nearly 3 million civil servants, a number almost identical to that at end-2007, just before the Great Recession. Intermoney says:

“The mistake is to deny this fact and take as a reference the 3.3 million reached mid-2011, when this stimulus was implemented at the height of the crisis.”