A welcomed balanced budget law for Spain

mrBy Juan Pedro Marín Arrese, in Madrid | After decades delivering a carrot to the regions showering them with billions, the council of ministers on Friday equipped itself, in passing the Budget Stability bill, with an efficient tool to square the accounts. The golden rule of balance throughout the cycle shall only start in 2020. But rules on bugeting, control and transparency, oddly not in place long ago, shall apply from now onwards. Being confronted as last year closure with such blatant deflection from deficit targets amounts to an unedifying spectacle whose repetition Spain cannot afford. Our credibility as a country depends on it.

The bill main added value involves setting expenditure ceilings and limits on indebtedness, thus reining the budget to meet its goals, plus detailed rules on budgeting, implementation and fair account of commitments. All this coupled with corrective measures to address deviations, ranging from rebalancing plans to fines for those disregarding warnings. The central government, at last, has the means to ensure that objectives are met. It also has the power to set them for each individual region. A huge leap forward by all standards.

The principle of structural balance has been solidly established starting in 2020. Meanwhile, ensuring a solid fiscal consolidation path remains the key issue. Rules to achieve this goal seem at face value less ambitious than expected. Reducing debt by 2% per year only if real growth exceeds 2% doesn’t invite to perform great efforts. Truly indeed, an annual average deficit reduction of 0.8% inevitably leads to trim liabilities. But the rate of adjustment does not match the seriousness of the current situation. Even more if one considers that waivers are foreseen in recession periods.

This apparent flaw stems from the obvious risk of entering legal pledges difficult to enforce in unforeseeable circumstances. Providing some leeway seems understandable. Especially if one considerers that the bill draws inspiration from the new European fiscal pact currently undergoing its final stage. But this package seems still open. German chancellor Angela Merkel is keen to harden its term, the ECB providing a helping hand, in exchange for increased firepower in the rescue mechanism whose purse is practically depleted. The Spanish government is right in adopting this initiative, despite the changes that might take place following the EU debate. Rules to be enacted amount to a floor that does’t condition, in any way, the unambiguous will expressed by the ministerial cabinet in establishing a demanding and swift path for consolidation. Regional and local authorities should interpret the bill this way.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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