Will the Spanish budget golden rule do the trick?

diidBy Juan Pedro Marín Arrese, in Madrid | The Spanish Government has just approved a bill enshrining the budget golden rule by 2020. It aims to balance income and expenditure over the cycle, departing from that principle only in exceptional circumstances like a full-fledged recession. Such far away objective seems less than ambitious. Especially taking into account the loose path established to ensure that goal.

Reducing debt by 2% only if real GDP grows more than 2%, amounts to mere tautology. Allowing for a slight inflation rate, you are always supposed to reach that goal. Reducing deficit by 0,8% on a yearly average, when your current figure is 8%, only leads you to a balanced sheet in year 2022.

Will the bill rein budget deficit? There are reasons to doubt it. More than half of total public expenditure is in the hands of regional and local authorities. They take the toll for the huge deviation from deficit targets last year (5% instead of 3% planned). For all the discipline imposed by the bill, it doesn’t match the fiscal consolidation effort they are supposed to make. Even more now that the central government has pledged to bail out any failing region, handing over to them  billions to redress their cash needs.

What is then the real purpose of such a bill? To begin with, it sets clear rules on budgeting and disclosure of all commitments entered. You might think these rules should be taken for granted. Not so. At last year closure we discovered, much to our surprise, that deficit run up to 8% when official forecasts put that figure at 6% only weeks before. Such unedifying spectacle, much undermining Spain’s credibility, should never repeat itself. One wonders why those rules were not in place long ago.

Corrective measures, ranging from rebalancing budgets to fines, are very much welcome to avoid such blatant deflections taking place. But what matters at the end of the day is the political will to enforce them. Time will say if regions abide to scale down their deficits soon enough, when the rhythm set out by the bill is so slow. There are reasons to remain sceptical about it.

* Juan Pedro Marín Arrese is an economist.

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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