Next Friday, the draft budget for 2015 will be forwarded to the Spanish parliament for its scrutinity. While it may respect, at least on paper, the yardsticks for fiscal balance, few believe the cabinet which takes office after the general election towards end-2015 will enforce them.
Political parties battling it out in a neck and neck contest, lure voters with shopping lists of free gifts and extra pocket money. The party in power has acted promptly, reducing taxes substantially from now onwards. Others promise a cheque for people earning below the minimum threshold. Structural reforms are carefully shelved, as words like sacrifices and efficiency enhancement are banned when campaigning.
Yet fiscal deficits show a rather dismal score. Extra savings from lower interest rates and unemployment allowances, roughly amounting to 1% GDP, have failed to trim expenditure. The overall goal was achieved in 2014, but a rather substantial overrun is expected in this current year. At mid-term, Spain is far away from meeting targets. This deviation has been caused by a combination of higher than warranted regional and local spending and an acute shortage in Social Security income. To make matters worse, there has been a sizeable jump in public investment, aimed at cashing in on better short-term employment prospects. In a year when Spain enjoys outstanding growth rates, this lacklustre budgetary outcome seems all the more disappointing.
The government plans to cut expediture by 4.4% in the coming year, but no one takes these pledges seriously. The elections will likely put a minority government in power, closely monitored by a supporting party all too eager to squeeze manna out of nothing. So the 2016 deficit target of 2.8% of GDP seems out of reach.
For the time being, Spain’s deficit seems firmly anchored by the massive liquidity injections pumped in by the ECB. Yet the economy’s external outstanding debt, amounting to slightly less than GDP, makes it extremely vulnerable to external shocks.
So far it has benefited from low oil prices and the recovery in private and external demand, leaving behind the crippling effects of the crisis. But should this favourable outlook suddenly change and there is a renewed burst of instability, Spain is likely to suffer its shockwaves.
The political environment does little to address this shortfall, as parties openly vie to offer voters a rosy picture. Let’s hope it doesn’t turn gloomy, as securing enough parliamentary support to cut expenditure seems a most implausible task.