Spain’s severity is not sustainable

Some good points on the Spanish situation. From Macrobusiness.

The pain in Spain continues with the government releasing the country’s latest budget which has been described by some Spanish economists as ‘the most severe since Franco’:

Spain’s government has announced $36 billion in new budget cuts, as it attempts to reassure the European Union that it will not need a financial bailout.

The budget savings will take the form of a freezing of civil servant wages, ministerial spending cuts and new corporate taxes, announced Soraya Saenz de Santamaria, the country’s deputy prime minister, on Friday.

“The ministries will see an average reduction of 16.9 per cent … there will be adjustments of over 27 billion euros [$36 billion] through revenues and through spending,” she said, after she and her cabinet colleagues passed the draft budget at a meeting in Madrid.

“This government will not raise value added tax but is calling for an extra effort within corporate taxes,” she said. Overall, government spending cuts will amount to $22.7 billion.

The government has also decided to freeze civil servants’ salaries, but to maintain unemployment benefits and planned pension increases.

Jose Manuel Soria, the country’s industry minister, further announced that electricity bills for small consumers would also rise by seven per cent during a quarterly review due in April.

De Santamaria termed the budget proposal severely austere, but essential. The measure is to go to parliament on Tuesday, and is expected to be formally passed in June.

The aim of these cuts are to reduce the Spanish budget deficit from 5.3 per cent of its gross domestic product from 8.5 per cent last year, €27 billion is equivalent to 2.5% of GDP. As we have seen from both Greece and Portugal this sort of abrupt cut in government spending has some serious negative flow-on effects to the broader economy which tends to lead to further unemployment and lower industrial production. Those problems, however, didn’t enter the minds of the Eurocrats as they congratulated the Spanish government:

Full article here.