State Budget criticised as electorally-oriented
Published: 27 October 1998
The Spanish state Budget for 1999, submitted in late September 1998, is characterised by greater public investment, lower personal income tax and lower interest rates. The trade unions have claimed that the Budget neglects long-term unemployed people and have criticised cuts in expenditure on health and education.
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The Spanish state Budget for 1999, submitted in late September 1998, is characterised by greater public investment, lower personal income tax and lower interest rates. The trade unions have claimed that the Budget neglects long-term unemployed people and have criticised cuts in expenditure on health and education.
On 29 September 1998, the Spanish government submitted its state Budget to parliament. Known as the Budget "for the euro period" (as the European single currency comes into being in 1999), it maintains and promotes the momentum of the economic policy pursued by the conservative government, the main objectives of which are price stability, reduction of the public sector deficit, high economic growth and low interest rates. The budget for 1999 once again aims at cutting the deficit of the public administration, from 2.1% of Gross Domestic Product (GDP) in 1998 to 1.6% in 1999. The final objective is to reach 2001 with a balanced budget, in accordance with the Stability Plan demanded by the euro.
In the area of inland revenue, a reform of personal income tax (impuesto de retenciones sobre las personas físicas, IRPF) will reduce fiscal pressure (ES9803250N). However, despite this reduction, revenue from the IRPF will increase by 2.8% in 1999. The special tax on fuels will also rise by 1.8%. In 1999, less revenue is expected from the privatisation of state companies, but privatisation will continue, and there are plans to sell public companies belonging to the National Society for Industrial Shares (Sociedad estatal de participaciones industriales, SEPI), of which the Iberia airline is the most important.
| . | 1996 | 1997 | 1998* | 1999* |
| Employment | 1.4 | 2.9 | 3.2 | 2.8 |
| Unemployment | 0.9 | -4.8 | -7.8 | n/a |
| Private consumption | 2.1 | 3.1 | 3.5 | 3.8 |
| Public consumption | 0.3 | 1.4 | 1.2 | 1.2 |
| Investment | 4.0 | 5.1 | 9.1 | 10.0 |
| GDP | 2.3 | 3.5 | 3.7 | 3.8 |
Source: Encuesta de Población Activa.
* 1998 figures are forecasts pending data for the last quarter. 1999 figures are estimates.
In the area of expenditure, public investment will increase by 6.1%, which is higher than the nominal growth in the economy (6%). The increase in public investment is arguably related to the forthcoming municipal and regional elections, and to pressure from the Catalan nationalist party (Convergència i Unió, CIU), which is the conservative government's partner.
Public expenditure is reduced mainly due to the 4.7% reduction in interest rates for public sector borrowing in comparison with 1998. On 7 October 1998, the Bank of Spain reduced interest rates by half a percentage point to 3.75%, the lowest figure in recent years and one that is well in line with the European Union's convergence targets.
Active employment policies
After two financial years of highly restrictive budgets, a macroeconomic stability has been achieved that now provides a margin of manoeuvre for public investment and the development of active employment policies. The funds allocated to the development of active employment policies is increased by 57% to PTA 736 billion, compared with PTA 469 billion in 1998. These funds are devoted to stimulating and managing employment, occupational vocational training and "workshop schools" and "trade houses", which are also related to local development policies. On the other hand, the funds devoted to unemployment benefits have been reduced, though this is still the largest item (64.7% of the budget), due to the continuing high level of unemployment (ES9810183F).
The estimates for job creation are less optimistic than in previous years, with a growth rate of 2.8%, compared with 3.2% in 1998. In other words, employment is not increasing at the same rate as GDP. The conversion of temporary employment into secure employment has also stagnated over the last few months.
Social policy
Social policy will involve an expenditure of PTA 1,800 billion, 46% of the total expenditure of PTA 3,900 billion by the state, the regional authorities and the social security system. The proportion of expenditure on pensions will increase by 5.5% to 27.6% and expenditure on health will increase by 5.6% to 12.9%. Pensions will increase by 1.8% in accordance with the forecast inflation rate, although this percentage may be revised if inflation is higher than expected in the last quarter of 1998.
Expenditure on social security is set at PTA 13,630 billion, with an increase of PTA 733,353 million, 5.7% more than in the previous year. However, this amount includes health, pensions and social services. An increase in revenue is expected, corresponding to the parallel increase in contributions due to job creation: 1,000 new jobs per day are forecast. The state will make an increasing contribution to health expenditure through current transfers, which will increase by 8.2% and will be devoted in particular to healthcare by the National Institute for Health (Instituto nacional de salud, or Insalud) and the payment of non-contributory social benefits. In 1995, the state financed only 77.4% of health expenditure and in 1999 it is projected that it will finance 98.4%. In other words, the universal character of healthcare is forcing the state to assume responsibility for it rather than charge it to the contributions of companies and workers. Lastly, the budget deficit of the social security system will be 0.8%.
Position of trade unions and employers
The trade unions maintain that the Budget is electorally oriented and regressive, and that it is particularly restrictive in the areas of unemployment cover, education and health, as well as in the wages of public employees. They believe that economic growth would give more room to active employment policies to stimulate the creation of secure employment. The recent reform of personal income tax (IRPF), which involved a reduction in state revenue calculated at PTA 500 billion, was seen as especially negative in relation to the interests of workers. The new maximum rate of the IRPF will benefit the richest, who represent 1% of taxpayers - 130,000 people who have received a tax gift of PTA 100 billion. For the unions, this amount could well have been used to guarantee benefit to 160,000 long-term unemployed people with family responsibilities who are without family income support.
The employers, however, represented by the CEOE, feel that this Budget contributes to stability insofar as it is in line with reducing the public deficit and with the objectives of medium-term stability. They also approve of the increase in public investment, which had been demanded by the Economic and Social Council (Consejo Económico y Social). On the other hand, they consider that the Budget should have frozen all public expenditure.
Commentary
This Budget may finally put an end to the national social dialogue, which has undergone serious difficulties over the last few months. A major point of contention is that the Budget ignores long-term unemployment. The social dialogue has progressed on only one point: access to pensions for part-time workers. Once the Budget is approved, the margin for manoeuvre and the possibility of new commitments amongst the social actors will be limited. It is therefore foreseeable that the social partners will find it difficult to reach a new general agreement.
On the other hand, the international market crisis could threaten the forecasts laid down in the Budget. The International Monetary Fund (IMF) has already suggested the need to reduce the expectations of growth in the Spanish economy. Although the government states that Spanish economic growth is healthy and stable, the climate of uncertainty in finance and in the international economy would advise caution in setting macroeconomic objectives, some of which may have to be revised in accordance with the development of economic events over the coming year. (A Martín Artiles, QUIT-UAB)
Eurofound recommends citing this publication in the following way.
Eurofound (1998), State Budget criticised as electorally-oriented, article.
