Spanish budget: austerity but little stimulus

The 2012/04/06 at 05:49
Valérie Demon, à Madrid

Mariano Rajoy (A.R.R.)
Spain's 2012 budget leaves little room for reactivating the economy.

The 2012 budget has not triggered much enthusiasm from those expecting stimulus measures. Under pressure from financial markets and Brussels, Madrid did not have much of a choice – austerity was the only way to go. Called "the most austere" budget since the start of democracy by the Spanish Minister for the Budget and Public Administration, Cristobal Montoro, the belt-tightening to come is tough: 27.3 billion euros must be saved by the end of 2012 in order to respect the commitment to a deficit of 5.3% of the gross domestic product (GDP). "A harsh and painful budget," in the terms of Spanish President Mariano Rajoy.


The government has attempted to spread out the sacrifices to be made. First to be hit are the ministries, whose budgets have been cut by an average of 16.9%. The Ministry for the Economy and Competitiveness will see its budget reduced by 19%. Awaiting further details, the Spanish Confederation of Employer Organisations (CEOE) and the Spanish Confederation of SMEs are already worried about losing funds related to stimulating economic activity and improving competitiveness. "These funds have already been significantly reduced in the last few years; the persistence of this reduction endangers mid-term growth," consider the two organisations in a press release.


While it has decided not to harm the country's already subdued consumption by not raising the VAT, the government is calling on all companies to contribute as their taxes will increase via a reduction of tax breaks. "We would have preferred to make an extra effort via non-productive expenses due to the effects that this type of measure can have on Spanish businesses and their cash flow," continues the CEOE. Employer organisations also point out the frequency of changes to the tax measures of the Spanish government. "It is necessary that this tax framework be stable and predictable to guarantee legal security. Otherwise this could be a threat to national and foreign investment."


While employer organisations say that they understand the need for such an austere budget given the economic circumstances, they are also preoccupied about the negative effects on economic recovery. All the more because the drastic drop in public investments will weigh heavily upon job creation. The Spanish Ministry for Development is among those to suffer the most, with a 34.6% fall in its budget: 144 million euros less for investments in infrastructures and 360 million euros less for first-generation highways. This despite the fact that the Rajoy government has launched an ambitious project for reforming and improving highways constructed in the 1980s.

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