Spain’s Prime Minister Mariano Rajoy unveiled his much anticipated 2013 budget that was quickly billed a crisis budget to lift the country from crisis. The Euro gained some strength based on what appears to be severe budget cuts and far less severe tax increases than expected.
Spain’s 2013 budget relies heavily on an increased Value Added Tax (VAT) to increase revenues. The budget has 43 moving parts that will make today’s distressed economy looks like a comfort zone by the end of 2013. The 43 new reform laws will be introduced over the next six months. The budget includes mandated reforms to the labor market, public administrations, energy services and telecommunications sectors. The most immediate question is how Spain can expect to reach a positive growth rate. This budget projects a 0.5 percent recession year. That would be a dramatic reversal of form.
The manufacturing sector is down, housing values are down as much as 60% in some areas. There is large scale social unrest throughout the country. There appears no hope for improvement of the 25% unemployment rate and this budget may very well expand that figure.
Under the Prime Minister’s plan, the central government will reduce spending or €13bn next year. Spending, not including Social Security and interest payments, will be down 7.3%. Revenues will increase 4% based on approval of a 15% increase in the country’s VAT.
Prime Minister Rajoy has come under fire from euro zone members because he has resisted applying for bailout funding. However, in the tenuous political position the Prime Minister finds himself, the formal application may well lead to his immediate ouster. Spain appears determined to grind out some form of recovery based on seemingly whimsical hopes of foreign investment. Whether it is a matter of convenience or from some source of unannounced insight, Germany believes that Spain does not need assistance.
However, on Friday a report on the state of the country’s banking system will be released. Analysts project a minimum of 60 billion euros will be needed to stabilize the country’s banking and financial industry.
Two big concerns from the European Commission are how Spain will handle its pensions and what it will do about the retirement age. Treasury minister Cristobal Montoro said pensions will increase by 1% in 2013. He refused to answer questions as to whether the government would pay a rate of inflation on previous pension payments. The possibility seems doubtful as it would add another six billion euros to the national debt.
The budget is based on a 0.5% recession rate for the upcoming year. This, in itself, would be a major financial and economic turnaround. The immediate response to the new budget was positive as the euro rebounded from two-week lows. Any gains could well be overshadowed by tomorrow’s bank stress test results.
Expected tax increases were not included on the revenue side. This may ease some of the tension in Madrid streets but will certainly cause concern with foreign investors.
Ministry expenditures will be cut 8.9% across the board. The budget will pressure provincial governments to increase their income according to preset limits. This is very likely to cause a spike in unemployment during 2013.
Spain’s frustrated workforce may have expected even deeper cuts and higher taxes. In order to qualify for bailout funding, Spain must formally apply for help. The precursor to receipt of the money will impose the same limitations placed on Greece, Ireland and Portugal. At this time, the euro zones fourth largest economy is trying to keep its independence and appease both frustrated euro zone neighbors and a hostile electorate. While the Prime Minister’s budget will make progress, a lack of growth will only lead to more unemployment and more hostile protests. Spain’s Prime Minister is in no-win situation. Tomorrow’s bank stress test results may well be the final blow to Rajoy’s hopes for financial independence.
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