The Euro crisis is returning. Yesterday the cost of borrowing ten year money for the Spanish government hit 5.98%, following a giddy rise in the last few days. The government was forced into announcing another Euro 10 billion of cuts, this time in regional government’s health and education spending.
Some of you may recall that recently we read of the most austere budget ever in Spain, with Euro 27 billion of cuts. This was the new government’s fevered attempt to get the Spanish public sector deficit down to 5.3%, from the 8.5% it ran at last year. In 2011 the then government overshot its target of a 6% deficit by a mighty 2.5% of GDP (around 27 billion Euros). This year the new government budgets to overshoot the old 4.4% target by just 0.9% of GDP. These are still large numbers.
The spin, as ever, differs from the reality. The Euro 27 billion most austere budget included Euro 15 billion of “cuts” announced last December. The austerity is tougher on the private sector than the public. It includes large increases in gas and electricity prices to cut the state subsidies. Income Tax goes up by tapered amounts, with a rate rise of 7% more on the higher incomes. Companies are expected to pay Euro 12.3 billion more . They aim to get Euro 2.5 billion from a 10% no questions asked tax for anyone bringing offshore money home. I cannot see that being too popular.
Central government personnel costs will rise by 1.3%, in a” tough” stance that includes a pay freeze! Like many governments, the Spanish one announces strict measures implying they are mainly public spending cuts, but in practice they are more to do with squeezing the private sector to pay for the bills. Yesterday’s news was for spending cuts in sensitive areas administered by regions often hostile to the central government. It was more an invitation to a row than anything else. Meanwhile unemployment benefit payments and interest bills surge.
The problem with all this austerity, as many now point out, is it can be self defeating. Spain needs a private sector led recovery. Instead the government is squeezing family budgets at all levels of income. This may produce a worse decline in national output than the government allows for in its figures. This in turn may produce less revenue, widening the deficit further. Yesterday’s move to appease the market gods may not succeed. Many EU countries need to run their public sectors more efficiently and do less through them. It would help if the EU showed them how, by cutting back on its own expenditures and requirements placed on EU member states. Instead, they just demand more, whilst also demanding that the member states borrow less. It is not a winning formula. Expect some more bad news from the markets. Spain denies she will need to put more capital into her banks, but some of them are having a hard time in the markets as well.