October 2, 2009

Spain, a walk through the economy

Author: Miguel Snchez de Pedro Abstract Mr Rodrguez Zapatero's economic policies demonstrated to be inconsistent, improvised and unsustainable. Spain needs more time and harder work than peer countries to recover. Structural reforms on education, fighting spreading corruption and strengthening the national political tissue are much needed to help the economy return to its growth path. Recession, unemployment and credit crunch expected to continue during 2010. Analysis FIRST, it was two million new employments our prime minister Mr Rodrguez Zapatero, promised (February 2008) to generate during his second tenure( 2008-2012). At the end of 2007 there were 1,837,000 unemployed people or 8.2% of active population. Eighteen months later (June 2009), unemployment rose to 17.9% adding 2,301,000 new people reaching 4,138,000, the highest unemployment record in Spanish history, and expected to increase substantially over the coming months. Our youth the hardest hit by this recession. Most likely Mr Rodrguez Zapatero will once more demonstrate unable to adhere to his promises of generating employment during his current term in office expiring in March 2012, or earlier if new elections are called upon in advance. SECOND, the national budget approved for the year 2008 showed an initial cash surplus of 0.3% of GDP. The budget execution, one year later, registered a cash deficit of 3.8% GDP or 41,874 million ($58,624) as per EU Excessive Deficit Procedure (EDP), after three consecutive years of cash surpluses of 1%, 2.0% and 2.2% GDP respectively. It should be noted that out of this deficit, 20,146 million ($28,244) representing 1.8% of GDP, were originated by regional (autonomous) and local governments over which the prime minister and his government has limited political influence for a healthy realignment with the consolidated public accounts. Interim GDP data for the first half of 2009 shows a decline of 3.7% compared with the same period of 2008. The current budget to end of July 09 is running a cash deficit of 50,946 million ($71,324) which is 40,393 ($56,550) higher than the one recorded in July 07 (10,553 or $14,774) and is likely to increase dramatically till the end of the year to some 9.5% GDP or 103 billion ($144), because: i) the planned tax increases will not take effect until mid next year; ii) higher cash contributions to pay for the unemployment bill; iii) weak consumer spending; iv) tax receipts well below budget, particularly that of VAT, personal and corporate income taxes; v) increased spending habits from regional and local governments; vi) the shorttermism strategy followed by Mr Rodrguez Zapatero in pleasing the demands of nationalists and minority parties in exchange for their political support in parliament. THIRD, the tax bill included in the 2010 budget aims to add 11,000 million ($15,400) on tax revenues, 60% of this figure expected to be collected during the second half of 2010 at the time the Spanish government estimates the economy will initiate recovery. The most relevant revenue items would be: i) increasing the general VAT bracket by 2% to 18% and the reduced rate by 1% to 8%; ii) increasing tax rates on savings and capital gains related incomes; iii) suppressing a 400 ($560) flat tax rebate on labor related income (payrolls) that Mr Rodrguez Zapatero brought just one year ago to stimulate constituents voting him again for a new term.

Extrapolating the current economic situation to one year later, nobody but the silliest economist on Earth can expect Spain to recover so much so fast. FOURTH, public finances continue to deteriorate. Expenditures increased dramatically with no signs of a much needed drastic cut off to help reduce current and forecasted deficits. As of July 09, public expenditures grew 24.5% over the same period of the last year to 109.7 billion ($153.6). On the other side of the coin, revenues sank over the same period 24.8% to 57.7 billion ($80.5). The 2010 budget, an "austere budget" as the Spanish government defines it, is not providing much hope for solving the structural imbalances in public finances appearing at the very early days of the prime minister's second term in office. FIFTH, Debt measured under EDP rules increased in 2008 51.6 billion ($71.2). This year Spain's cash needs to finance the running budget deficit will take some 116.6 billion ($163.2) from national household savings and financial intermediaries as well as from international markets, thus wiping out much needed credit resources to help recover growth of the economy. The Spanish government expects debt to represent 53.4% GDP or 582.1 billion ($814.9) at the end of 2009 and an estimated 668 billion ($935) or 63% GDP which will exceed by 3% the EDP 60% cap. Spain's Treasury would need to undertake heavy work over the next four years as debt maturities falling within 2010-2014 amount to an estimated figure of 235.9 billion ($330.3) -55% of current debt- and, given the expected budget deficits it will most likely have no other option than rolling debt over at higher interest rates and longer maturities. SIXTH Prime minister Mr Rodrguez Zapatero and the core of his ministers were first, very reluctant and finally very late in recognizing that Spain were entering into crisis and rapidly deepening into recession. Over his term as prime minister, Mr Rodrguez Zapatero has demonstrated his dangerous incompetence accompanied by acute disdain to tackle with economic issues; a short-termism populist politician with no mindset for the economy. When Mr Rodrguez Zapatero became prime minister, one of his economic ministers offered him to teach the fundamentals of the economy in just two evenings. Here below, some pearls of Mr Rodrguez Zapatero's speech: "Over the next mandate, Spain will achieve full employment. I do not want this to be circumstantial but definitive" (July 3rd,2007); "Spain is safe from the international financial crisis" (August 21st, 2007); "we have the lowest rate of unemployment in history. The Spanish economic model is an international model for solvency and efficiency" (September 6th, 2007); "by making use of football terms it could be said that Spain has entered into the Champions League of the world economy" (September 11th, 2007); "there are no stirrings about economic recession. The Spanish economy has very good fundamentals" (October 16th, 2007); "originating unjustified alarmism about the economy of a country can damage expectations. Let me to say that this is the less patriotic that I know" (January 9th, 2007); "the crisis is a fallacy, pure catastrophism. We are growing above 3%. Even if tomorrow we grow at 3% or 2.8%, which is good growth, we will continue creating employment and surplus" (January 14th, 2008); "The public accounts have generated surpluses over the last years, 70 billion which allow us to have a guarantee, a strength to attend any need. Deceleration will not be deep nor lasting. It will be a deceleration for which our country is better equipped than anybody else" (February 28th, 2008);"I promise to originate 2 million employments" (March 3rd, 2008); "Spain is in conditions to arrive to full employment" (March 7th, 2008);"As everything.it is debatable and it depends on what we understand as crisis. For a concept such as crisis, it should be asked to economist and likewise they would not come to agreement"...The government has been the one more accurate with predictions" (June 29th, 2008); "The economy faces a difficult and complicated situation" (July 2nd, 2008);"in this crisis as you want me to say...there are people that will not suffer any difficulty" (July 8th, 2008);"I believe that during the second semester of next year, we will be with a growing economic activity" (October 19th, 2008); "No, nobody knew it. As soon as we have entered into an objective crisis situation, I have been the first one in talking about a crisis of the international financial system and the economic crisis. In March (2009) employment will start to increase strongly" (December 18th, 2008); and last but not least "it is likely than the worst of the crisis is already over" (April 29th, 2009). ... and some other illustrating statements from former Vicepresident and minister of the economy Mr Solbes: "the effects of the subprime crisis in US will have a relatively low impact

in the Spanish economy" (August 17th, 2007); "those who augur the risk of recession do not know nothing about economy. The Spanish economy will grow during the next four years at a rate close to 3% which will permit originate 1.6 million new employments and keep unemployment rate close to 8% of active population" (February 11th, 2008);"in fact our forecasts point to a recovery of the economy's growth rates already during the second semester of 2009 which, in 2010 will allow growth at a pace close to 3%" (May 8th, 2008); "the Nation will have a budget surplus despite an unfavorable economic conjuncture" (June 12th, 2008);"to recession we will not arrive in any case and to negative growth I expect also not; this is not our working hypothesis" (July 24th, 2008). References http://www.sgpg.pap.meh.es/NR/rdonlyres/B0BAF4E0-8822-4159-AAB711353B4F51FF/18213/LIBROAMARILLO2008.pdf http://www.bde.es/webbde/SES/Secciones/Publicaciones/InformesBoletinesRevistas/BoletinEst adistico/09/bes0907.pdf http://serviciosweb.meh.es/apps/dgpe/TEXTOS/pdf/completos/sie_complet6.pdf http://www.tesoro.es/doc/SP/home/estadistica/genesp.pdf http://www.bde.es/webbde/SES/Secciones/Publicaciones/InformesBoletinesRevistas/BoletinEc onomico/09/Jul/Ficheros/indica.pdf http://www.igae.meh.es/NR/rdonlyres/941355A6-3E4A-4589-B95A5A44D5CFD30C/22147/Primeranotificaci%C3%B3n2009.pdf http://www.sgpg.pap.meh.es/NR/rdonlyres/71585171-B609-454A-9A959A7D84AED9E1/23148/LIBROAMARILLOPROYECTO2013.pdf http://www.sgpg.pap.meh.es/NR/rdonlyres/71585171-B609-454A-9A959A7D84AED9E1/23146/CUADERNOBLANCO2010PROYECTO3.pdf http://welcome.plane.gob.es/