Spanish 2018 Budget: Subject To A Raft Of Doubts

Mr Rajoy's government has to approve Spanish 2018 budgetMr Rajoy's government has to approve Spanish 2018 budget

Budgets whose approval is subject to a raft of uncertainties has sparked subdued interest. In the end, despite such adverse predictions the most likely thing is that they are approved, not without there being some changes. So it’s less important to analyse the details than to evaluate the overall focus. Undoubtedly the budgets adhere to wish of the government to take back the initiative, overcoming the sensation of paralysis which it is transmitting due to its growing isolation. The polls have fuelled the fight to gain voters’ favour way ahead of the next elections. In such an environment, managing to gain the support of Ciudadanos for the budgets is like being thrown a lifeline as it contributes to neutralising the formation which is being created in the main political rival. The budgets are also aimed at curbing the wave of discontent amongst a huge amount of voters faced with having to bear additional sacrifices after years of adjustment. If initially public sector workers’ demands were listened to, tackling in particular the comparative grievances of the state security forces, pensioners’ protests have set off the alarm bells. No wonder, as this group represents one of the main fishing grounds of votes for the ruling party.

In the State’s accounts, these improvements will translate into a moderate increase of 300 million euros in personnel expenses, while the decline in personel tax is estimated at around 2 billion. At the same time, the 1 billion euros rise for the lowest pensions accounts for almost a sixth of the global increase in this item in the Social Security Accounts. In short, a moderate price which is incapable of affecting the overall equilibrium, as the spending cap of 1.3% is upheld, much lower than nominal GDP growth. There is also no doubt over the objective of achieving a public gap which is below the barrier of the 3% excessive deficit. The current tailwinds make it possible for this goal to be met without too much difficulty.

Meanwhile, the increase in contributions will alleviate to some extent a deficit in the Social Security which is now at 12%. At the same time, low interest rates allow for contention and even reduction in the huge amount of financial expenses. Not even the notable rise in transfers to the autonomous regions and territorial administrations, to the tune of a little over 4 billion euros, has a significant impact. This is because it is mostly financed by a share in ceded taxes and the end result depends on how tax collection has gone.

The only risk of diversion lies in the estimates of revenues which fuel quite a few doubts, as they predict increases of over 6% in the main tax figures. Despite the economy’s expansion, these rates seem excessively optimistic. It gives the impression that, once again, the books are being balanced with the help of somewhat voluntaristic tax collection estimates. A phenomen which has some logic when it is based on the imperious necessity to meet demanding deficit targets at all cost.

The whole budgetary strategy revolves around containing spending, the only real guarantee for ensuring that the deficit does not move away from this ambitious objective. While spending remains tightly controlled by a cap which allows for very few joyful moments, there is no real risk of non-compliance.

A quick look at the accounts shows the meager cushion the State has for increasing spending, unless it starts out on a race of substantial tax hikes, taking resources away from private business. In practice, it’s a mere compensation fund, transferring virtually all the funds it collects: 138 billion euros are transferred to the territorial administrations and 38 billion to organisations which cover spending programmes of an almost obligatory nature like contributions to the UE or the Social Security, as well as subsidies for railways or other public services. So there are hardly any resources for discretional use, once the 32 billion euros of personnel expenses is covered, including pensions, or the 31 billion of interest on debt. There is no room for deception. The public accounts are so rigid that they don’t allow for any consideration of including additional payments without risking their stability. Even more so if we take into account the absolute priority which needs to be maintained with the path of consolidation.

Although the deficit has been significantly reduced over the last few years, we need to move without delay into primary surpluses which contribute to cutting the mountain of liabilities before they weigh heavily on the budgets. We have a window of opportunity which would be reckless to lose. Particularly if it is spared in the increasing resources which should be earmarked for covering pension payments. Apart from ensuring the viability of the Social Security system in the medium and long-term, it is imperative to anticipate the financing of an issue which will take up an increasing percentage of resources, whatever model is used. There is also a serious challenge with regard to avoiding excessive increases in big items like health or education, no matter how unpopular that is.
















About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.