From independence, freedom and truth


Deficit and public debt in Spain: where’s the success?

Fernando del Pino Calvo Sotelo

March 22, 2013

The great philosopher George Santayana wrote a memorable sentence:  “Skepticism is the chastity of the intellect, and it is shameful to surrender it too soon or to the first comer”.  Spain’s 2012 budget deficit figures have recently been published and everyone seems cheerful about them, not least the government. Should we yield to this fiesta or should we show some sober skepticism? Is labeling these results as a success a fair judgment or just propaganda?

In run-of-the- mill countries, deficit over GDP is simply a number. But you know, “Spain is different”, therefore we need a whole formula to say what the deficit was in 2012: 6.7%+3.3%=10%. That is to say, deficit before the public aid to the cajas (Spain’s regional banks, owned by the regional governments and controlled –ruined, if I may say so- by regional politicians), the aid itself and the total deficit. You may believe that the numbers are split with the purpose of appearing more palatable. That might be the case, but I don’t think so: all socialist leaning governments, including our current center right-disguised socialist administration, believe that deficits do not matter, and continue believing so until the very eve of the default. Our government seems to worry about deficits only to the extent that they might breach the target set by the EU subjecting Spain to the sanctioning procedure, probably not because of the penalty itself, but because of the potential political damage to its beloved image. As long as this does not happen, it doesn’t matter whether the deficit is high or low, true or doubtful, convenient for Spain’s future or not. Therefore, the unsanctionable deficit was celebrated with fanfare. This was nothing short of amazing, as Spain had missed its promised deficit target three times. The current government asked the EU in March 2012 to raise the previous target of 4.4% over GDP, and Europe graciously accepted a higher 5.3% target. The Finance Minister said then: “Spain will be reliable in 2012 and will honor its commitment of achieving a deficit below 5.3% over GDP”. The Vice President didn’t want to sound less emphatic and added: “Spain will hold true to its word”. A few months later, after a complete failure of all its forecasts, the Spanish government  made Spain break its word and requested the EU to raise its deficit target for a second time, to 6.3% over GDP. The EU agreed. I do not think this was good news. How can we take fiscal discipline seriously in Europe if no one feels bound to any rules any longer and conditions imposed upon countries are relaxed as fast as infringers break them? However, the Spanish government, specialized as it is in tiny, shy mini-reforms sold as structural reforms, feels at ease with mini-requirements, and was happy about the change, which didn’t prevent it from breaking its word for a second time in less than a year. It is frankly annoying that, with such record behind it, the deficit announcement has been made with arrogance instead of some circumspection and humility.

On the other hand, does the deficit figure respond to a prudent calculation? Is it reliable? Look, official figures have an aura of respectability that is not supported at all by hard evidence. If in a small business accounting practices legally allow it to state its results within a broad range, just imagine what you might expect from the complex macro aggregates (presented by politicians, not the most credible of all professions). Let’s practice some healthy skepticism, then. Why should I trust the deficit number? Firstly, it comes from a government which breaks its promises so often that it’s hard to keep pace, beating the previous administration’s record – no small feat. Not to mention the regional numbers – regional expenditure accounts for the majority of public expenditure in a country as decentralized as Spain. Bear in mind that in Andalusia, for instance, the regional socialist government is being investigated for having presumably engaged in a fraud reaching EUR 1.4 bn., several high officials having been already arrested. Secondly, the deficit is not audited by any external independent body. Eurostat neither collects nor audits the data, but consolidates and harmonizes them to allow a country to country homogeneous comparison. That is why Eurostat took Greek or 2011 Spanish deficits to be true, when they weren’t. Thirdly, if politicians lie with their numbers, nothing happens. Please remember that, according to the current administration, the previous one lied about the 2011 deficit figure, which ended up being 9.4% of GDP instead of the expected 6%. No one was held accountable. In the real world of business, such behavior might have been considered false accounting or fraud to investors, eventually leading to up to 4 year imprisonment. In the privileged world of the above-the-law Spanish politicians, impunity rules. This perverse incentive system (no audit, no accountability) should signal to anyone receiving official numbers to treat them with an aloof and cold attitude, not with blind belief.

But even if we take the 6.7%+3.3%=10.0% deficit as it is, let’s not forget that this government has only been able to achieve that number after raising income tax (one month after promising it wouldn’t do so), raising VAT (three months after denying it would, “so as not to affect consumption or derail the economic recovery”), not paying government employees in extremis its Christmas extra pay awarded by contract and postponing VAT returns until January out of a magician’s hat. Let’s see what they do in 2013. Will they come up with curtailing public squandering, closing down the thousands of public enterprises, town halls and other regional bodies that are a dead weight or eliminating the regulatory duplicities the President promised to abolish (but somehow forgot) more than a year ago? The snowball keeps growing, the economy worsens, taxes and regulations suffocate businesses and individuals alike, the regional nightmare goes on and the financial sector will surely require further aids (note: home prices declined in 2012 nearly double what was expected by Oliver Wyman’s government sponsored famous report on the Spanish financial sector).

The deficit was published with a boasting mise en scene , in deep contrast with the stealthy publication of the public debt figure, which increased by some 15% of GDP in 2012 alone, as far as I know, the largest increase in all OCDE countries. It is well known that economists obsess about flow variables ignoring stock variables (one of the many reasons why they failed to prevent the current crisis), but this is a tremendously relevant datum. At the current pace, Spanish public debt will surpass 100% of GDP by next year. Please bear in mind that with much lower indebtedness, Spain was at the brink of defaulting in 2010 and again in mid-2012, when some declaration of intent by the European Central Bank saved us. Naturally, the government, slave to a fatal combination of arrogance and complacency, believes it was its tiny, shy mini-reforms which saved us, and confuse the market’s truce with a final ceasefire. This truce might bring with it the mirage that we are already out of the woods and that the risk of default has vanished. However, the hard reality is that Spain is still a critically sick man connected to the ECB artificial ventilation system. Caution!

In the final analysis, I believe the government appears to have much more control over public finances that it really has, and neither understands nor does it want to understand that the size of the Administration in Spain is untenable. That’s why I think the probability of meeting our 2013 deficit target is 0, or to state it more clearly and in the government’s own language, 0.0%+0.0%=0.0%. I suspect that it will keep raising taxes as soon as its recurrent forecast failures come back to life, worsening the situation even further. We do need an urgent change of course, but I very much doubt this crew wants or even knows how to do it.


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