Spain is set to unveil its 2013 budget tomorrow.Protesters are in the streets today displaying their anger toward austerity.
And Spain’s biggest economic region, Catalonia, is threatening to secede from the country due to similar differences over budgetary measures.
Meanwhile, the troika of international lenders is pressuring Spanish prime minister Mariano Rajoy to find ways to reduce Spain’s budget deficit, thereby opening the door for the much-awaited bailout of the Spanish government that everyone expects is only a matter of when.
Rajoy is clearly between a rock and a hard place – voters protesting austerity on the one side, and international creditors demanding it on the other.
So, what more can Rajoy target in Spain’s budget tomorrow?
In an interview with the Wall Street Journal yesterday, Rajoy gave a preview of the budget he plans to unveil tomorrow:
The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country’s debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday…”The retirement age is reasonable in Spain if it is actually met,” Mr. Rajoy said—referring to the mandated age of 65 years—”so we are going to deal with those issues of early retirement.” He said the government wouldn’t eliminate the option of early retirement but would limit the capacity of individuals to stop working at around 60, as many do now.
Rajoy also told the Wall Street Journal that new budgetary measures would “include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations.”
JPMorgan analyst Jaime Becerril thinks the reforms will fall heavily on the shoulders of regional governments. He wrote recently that “regional governments will be the main target of reforms even if they oppose them.”
That of course explains why the burgeoning Catalan separatist movement is such an explosive crisis – it’s happening right as Rajoy needs to be offering the regions less support.
Becerril also points out that “Spanish regions revealed an accumulated budget deficit of 2.9% in 2011, driving the main deviation for the country’s overall budget deficit, finishing with 8.5% vs an initial 6% target.” He says some of the regions have unveiled both tax increases and spending cuts already, but given the high levels of debt in the regions, Becerril says those measures “will have to increase.”
Again, the regional governments in Spain have not been very receptive to such ideas.
Even still, Spain is not on track to meet its deficit targets. Daiwa Capital Markets analyst Tobias Blattner told Reuters, “I think the deficit target for this year will likely be more in the neighbourhood of 7 per cent, rather than the 6.3 per cent that they postulated.”
Here are the reforms Spain has been asked to implement by the EU, via BofA’s Sergio Gamez and Ruben Segura-Cayuela:
Spain was asked, among other things, to:
- Implement reforms in the public sector to improve the efficiency and quality of public expenditure at all government levels.
- Ensure that the retirement age is rising in line with life expectancy when regulating the sustainability factor foreseen in the recent pension reform.
- Implement labour market reforms and take additional measures to increase the effectiveness of active labour market policies.
- Liberalize professional services and reduce barriers to doing business.
From this long list, Spain has not yet established an independent fiscal institution, nor has it taken further action on pension reform, as requested by the European Council, or introduced ‘active policies’ for the labour market. Liberalization of professional services, the elimination of barriers to doing business, and the reform of the public sector are proceeding, but at a very slow pace. More importantly, although complete information is lacking, measures announced in the requested biannual budget report appear insufficient for Spain to meet its deficit targets of 2013 and 2014.
If this week’s response from the electorate is any indication, whatever spending cuts Rajoy chooses to target are not going to appease those protesting in the streets.
Meanwhile, the odds aren’t looking good that the troika will be too happy either.
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