From independence, freedom and truth


The bottomless pit of Spain’s deficit

Fernando del Pino Calvo Sotelo

April 9, 2014

How little we demand from our political class. They know perfectly well that the bar is set very low and that there is no punishment for incompetence; therefore, they feel no urgency to improve their performance and instead ride conceitedly that sad and pathetic horse called the fear of politicians, one of Spain’s greatest social sicknesses. Even those leaders whose ineptitude has harmed our country the most suffer a miraculous metamorphosis by which the mere passing of time turns them into statesmen, thus putting both our memory and our patience to the test.

Only within this framework can one understand the complete absence of critical spirit in the presentation of the 2013 public accounts which, in my view, paint a pretty disturbing picture. Firstly, the accounts have been published one full month later than what has been standard procedure in the last few years. Maybe this fact is inconsequential, but in the private sector, any delay in the publishing of a company’s annual results is seen with apprehension. Furthermore, it should be noted that public accounts are not subject to any external audit to be made within six months of the year end (by the way, why not?), and empirical evidence shows that cooking the numbers appear to bear no legal consequence whatsoever. Secondly, public deficit is, yet again, higher than 7% of GDP while, according to the Bank of Spain, public debt increased by 77 billion euros (roughly 7.5% of GDP), reaching 94% of GDP. This is the worst situation of Spain’s public finances since the War of Cuba, more than a century ago (back then a debt restructuring became inevitable). Thirdly, we have failed to meet our deficit target for a fifth time in a row, a true record. The excuses stated to justify the shortfall vary from year to year: it must be acknowledged that in this respect the government shows a certain measure of creativity. On this occasion it argues that the recession (we have to understand they failed to forecast it, in yet another sign of poor foresight) turns the deficit’s black hole into a Homeric feat, a truly awesome success. I would call this overshooting the mark by quite a bit!

The script followed by the current government in 2013 has been a copy of the one it followed last year. Right after reassuring the EU that we would achieve the deficit target “without a doubt”, it begs Brussels to allow for a much higher number. The EU accepts (in March 2013, the deficit target was eased from 4.5% to 6.5%). Time goes by. Months later, our government watches in disbelief as the new target seems as unreachable as the older one. It then desperately raises taxes and, in the very last weeks of the calendar year, when everything has proved insufficient, they engage in aggressive accounting and botched jobs of doubtful legality that totally destroy the empire of the law. Last year public workers were the victims; this year it has been the utilities’ sector.

Lasciate ogni speranza, Dante wrote 700 years ago. Lose all hope: this government will never reduce public spending. As exemplary members of the Socialist-Keynesian Lodge, they think that deficits don’t matter and that public spending is to be preserved so that GDP (what an awkward measure!) does not suffer. It is just possible that they are also influenced by the idea that any trimming of the huge squandering hidden in public expenditures might harm the parasitic web that our political class has successfully woven during the last 35 years. That’s why we should not be surprised by our President’s remarks a few weeks ago, when he stated that “false myths” existed regarding Spanish bureaucracy, and that neither our Mammoth-like public administration was “gigantic” nor did it weigh “heavily” on our pockets.

You might argue, my dear reader, that this shocking loss of reality is common among the members of our political class, who have been living in a bubble since they were twenty something, protected from the inclemencies of normal life while commuting every few years from the ministry to the party headquarters and back. Because if the Spanish public administration is a role model of efficiency, size and lightweight, why has the government proposed its reform? When did the government somehow forget about its promises on the regulatory duplicities, the rationalization of the insane regional maze, the elimination of some of the 8,000 local councils, the disbandment of state-owned companies and the privatization of the few relatively attractive ones?

The government believes that the true problem is that is does not collect enough taxes. Tax income as a percentage of GDP, it argues, is lower than in other European countries, and that justifies raising taxes willy-nilly, inventing bizarre taxable events, destroying the taxpayers’ presumption of innocence and harassing them with the excuse of real and imaginary tax evasion, of course as long as the taxpayer is not a political party, a trade union or any other entity belonging to the ruling class. I just don’t get why the government obsesses with increasing tax income which does not depend directly on governmental action, and avoids focusing on reducing public spending, which does directly depend on it. Not acting on the variable on which you have control and trying to act on the variable you don’t control is a bad idea. As is the strategy of crossing your fingers expecting that this year, or the next, or the following one, a miraculous economic recovery will solve the problem for you (hopefully just in time before the elections).

In order to reduce a public debt roughly equal to GDP the Spanish economy would have to grow on a sustainable basis at rates which are unimaginable within the current macro environment; perversely enough, the very same high indebtedness would hamper the much needed growth (Rogoff, et al). We are approaching a point of no return. To prevent this, it is critical for the Spanish economy to reinvent itself so that its growth potential may be significantly increased. However, those deeply needed structural reforms, which the government was seriously obliged to undertake after the disastrous performance of the previous socialist administration, have not been put into place. Not only that, but I have concluded that this government will never carry out those reforms. Please bear in mind that that Spain has a political and economic model that has produced an average unemployment rate of 17% in the last 35 years. Average. We could put up with this disaster because in our starting point in the mid-seventies we enjoyed much lower tax rates and a public debt of around 10% of GDP. This is obviously no longer the case. The old engine of the economic machinery of the 1978 regime, full of rigidities, swarmed by all sort of national, regional and local legislators writing all sort of absurd rules, suffering from an epidemic of license-givers, papers-askers, red tape-producers and obstacle-builders, weighed down by all kind of parasite entities, is dead. If we insist on trying to work with it, Spain will neither be able to compete in a globalized world nor survive the debt trap.

Thanks to the ECB, we are now living the high life in the European periphery’s bond markets. The new bubble allows us to pay today, with 7% deficits over GDP, 94% public debt over GDP and 26% unemployment rates, lower interest rates on our 10-year bonds than when we had surpluses, less than 40% debt on GDP and 8% unemployment rates (why the fuss – broken Greece pays just 6.5%!).

Thus, I can perfectly understand that, with the apparent economic stabilization, the highly publicized tax revenue increases and the market bubble, you’ll be surprised by my fear that we might be moving forward slowly but steadily toward some kind of default. Let me soothe the anxiety of my government readers: that won’t happen before the elections. That’s all that matters, right?


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