2003 state budget approved

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In autumn 2002, Spain's conservative People's Party government adopted the 2003 state budget, which continues an economic policy based on restricted expenditure, a zero public deficit and cuts in direct taxes such as personal income tax. The trade unions, and much of the political opposition, consider that the government's economic policy is highly conservative and that its diagnosis of the socio-economic context is too optimistic.

In autumn 2002, the conservative People's Party (Partido Popular, PP) government approved the state budget for 2003. The budget is the first since the establishment of the new budget stability laws, whereby all public administrations are forced to spend no more than their income, as the basis of a 'zero deficit' policy in the public sector. Expressing as it does public socio-economic policy, the state budget is a key factor in the development of the labour market, whether directly or indirectly.

Main provisions

The government calculates that in 2003, Gross Domestic Product (GDP) will rise by 3%, a higher level than in the previous financial year. It forecasts that, for the seventh consecutive year, the Spanish economy will grow more than the EU average and Spain will continue to be one of the countries with the best prospects in the Organisation for Economic Cooperation and Development (OECD). Based on this forecast, according to the government, employment will rise by 1.8%, or about 282,400 new jobs. As for inflation, it is calculated that in 2003 the retail prices index will rise by 2%.

The main planks of the government's budgetary policy are: giving priority to a stable, balanced budget; fiscal decentralisation through transfer of powers to the regions (autonomous communities); a reform of personal income tax (Impuesto sobre la Renda de las Personas Físicas, IRPF) (ES0205207F); giving priority to expenditure on law enforcement and justice; and a certain degree of social and public investment expenditure. The government's grounds for applying this policy are its positive economic forecasts — which it believes to be realistic — and a need to offer a favourable framework of expectations. This is possible thanks to a zero deficit, which does not apply pressure on public sector borrowing and therefore helps to control inflation, and an efficient fiscal policy.

There will therefore be tax cuts, particularly in the IRPF (a progressive and direct tax), from 1 January 2003. The government calculates that this will lead to an overall reduction of 11.1% in personal income tax, rising to 38.1% for the lowest incomes. This move may be aimed at fostering private consumption in order to stimulate the economy and therefore employment. The IRPF reform is a continuation of one implemented in 1999 (ES9812290F), and offers tax deductions which are favourable to families, women, the elderly, people with disabilities and small and medium-sized enterprises (SMEs).

Another characteristic of the 2003 budget is administrative decentralisation. It transfers responsibility in terms of income and the management of public services to the regional governments.

The existence of a 'zero deficit' is the result of compensating the national budget deficit, calculated at 0.5% of GDP, with the surplus of the social security system, which is also 0.5%, and this has made it possible to provide a higher level of funding for the pension reserve fund (Fondo de Reserva de las Pensiones). The total public expenditure limit for 2003 will be EUR 114,518 million, a figure which was approved in May 2003 and represents growth of 4.1% of real GDP, and under 5.8% of nominal GDP.

However, spending will increase on some items in the public budget. The budget for law enforcement will increase by 7.4%, in order to take action on crime and terrorism. The budget for justice will increase by 6.7%, in order to modernise the legal system. Social expenditure will increase by 8.2%, reinforcing mainly pensions and health, at least relatively. Investment in infrastructures will increase by 8.3%, as will the budget for research, development and innovation).

Reactions

The opposition political parties — particularly the Socialist Party (Partido Socialista Obrero Español, PSOE) and the United Left (Izquierda Unida, IU) — and the main trade unions believe that the government's macroeconomic forecasts are too optimistic. For varying reasons, they disagree with the government’s economic policy.

The Spanish Confederation of Employers’ Organisations (Confederación Española de Organizaciones Empresariales, CEOE) is still concerned about the high inflation in Spain compared with the rest of the EU and feels that the positive effects of the current favourable economic cycle in Spain, which is out of step with the rest of Europe, may be ending. When the rest of Europe begins to recover and inflation rises, the foreseeable increase in interest rates may have a negative effect on a declining Spanish economy. However, in general CEOE feels that the government's policy is appropriate, though it insists on the need for policies to favour productivity.

For some years, the trade unions have been calling for a strategic reorientation of the government's socio-economic and labour policy. In terms of economic policy, it is a priority for the unions to obtain Spain's real social and economic convergence with the rest of the EU. In particular they call for an increase in the national minimum wage to at least 60% of the average net wage (in line with the recommendations of the committee of independent experts which advises on the implementation of the Council of Europe's European Social Charter) (ES0209202N). Furthermore, the current fiscal reform may lead to lower revenue, and the unions fear that this may again be compensated from the surplus of the social security system and the National Institute of Employment (Instituto Nacional de Empleo, INEM), thus causing a 'social deficit'.

Commentary

In general, the government has taken a firm stance in the fulfilment of its electoral programme, a model that has obtained the results desired by the government: higher economic growth than the EU average; control of public expenditure and a balanced budget; and even low inflation, though it is slightly higher than the European average. However, it is possible that the government has underestimated the role of the downturn in the international economy and the delayed effects that are occurring in the Spanish economy and industrial relations. In Spain, the economic cycles are traditionally intense (both upward and downward) and out of step with the rest of the EU. (Daniel Albarracín, CIREM Foundation)