Sunday, January 8, 2012

Responses To Rajoy's Economic Policy

Republished from

A month into Mariano Rajoy’s tenure as Spanish President, his economic policy has crystalized around better governance and austerity amidst the revelation that Spain’s deficit is larger than previously thought. In short, the economy policy contains the following elements:

The crackdown on provincial spending has produced perhaps the loudest political response, with the opposition socialist party accusing Rajoy of using the crisis as an excuse to impose his centrist ideology. Catalonia, Andalucia, and the Canary Islands vow to bring the matter to the Supreme Court. Catalonia in particular has made important strides in the last year through its own austerity measures and a local bond issuance, though its debt still straddles the prescribed limit.

But Rajoy’s tax policy is probably of most interest to European policymakers still searching for the right balance between austerity and stimulus. Rajoy’s hand was forced towards austerity after the finance ministry revealed that Spain’s deficit will reach 8.2% of GDP this year, up from a projected 6%. As late as November, the government estimated the deficit at just 4.8%.

Though the tax increase breaks Rajoy’s campaign promise, a majority of those surveyed by El País prefer this route over the alternative of cuts in social services. The sentiment is likely aided by rhetoric that the taxes disproportionately affect wealthy citizens and that the value-added tax will remain untouched. There is also a plan to recoup €8.17bn a year in unpaid taxes, mostly from corporate offenders – a quick hit that could reduce the deficit by up to 0.7% of GDP.

Meanwhile, the government will raise pensions for the country’s poorest and hold electricity tariffs constant for small consumers. The safety net, however, does not apply to the roughly 5 million illegal immigrants or the estimated 300,000 migrants who have lost working visas.

All told, the policies trim €16.5bn off the government bill and Rajoy is adamant Spain will meet the EU’s deficit target of 4.4% of GDP in 2012.

Pundits’ opinions about Rajoy’s strategy are mixed. An analysis from El País found that, while the top marginal rate had increased 7% to up to 55% in some autonomous communities, “working people” would still bear two thirds of the increase. With that in mind, Joachim Voth at the Barcelona Graduate School of Economics predicted in a blog post that the tax hike “will hardly produce any extra revenue” and that Spain would “repeat some of the Greek experience,” with growth slumping further.

The business journal Expansión simply accuses Rajoy of a political identity crisis since conservative candidates typically opt for supply-side regulation. The previous socialist government had already lowered the small business tax rate from 30% to 20%.

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