Government endorses plan to cut public deficit

The Spanish government has endorsed a drastic plan to cut the public deficit. The plan includes an average reduction of 5% in public sector wages, a freeze on pensions, changes to the partial retirement regulations, withdrawal of the ‘baby cheque’ for mothers and cuts in pharmaceutical expenditure. Trade unions showed their opposition by calling a strike of public sector workers on 8 June 2010. In parliament, opposition political parties condemned the freeze on pensions.

Decline in public finances

Spain’s public deficit reached 11.4% of gross domestic product (GDP) at the end of 2009. This was caused by high-spending fiscal policies aimed at stimulating growth and employment, an increase of unemployment benefits and a loss of revenue from income tax.

Greater focus on reducing deficit

This worsening of public finances has led the government to give greater priority to deficit reduction than to boosting economic growth and employment. This was confirmed on 20 May with the ratification of Royal Decree Law 8/2010. The law calls for cutbacks in the government’s key social policies and the first public sector wage cuts since the end of the Franco era. Other equally significant adjustments are summarised below.

  • The General State Budgets for 2010, approved in December 2009, forecast an increase in revenue from value-added tax (VAT) as of July. The general rate of VAT is rising from 16% to 18% with the lesser rate increasing from 7% to 8%.
  • There is to be an increase in savings tax rates (from 18% to 19% for the initial €6,000 and 21% thereafter) and increased taxes on tobacco and fuel.
  • Cuts will be made in nearly all areas, including a wage freeze for public sector workers and a moderate rise in pensions (1%). By doing this, the government expects to increase its revenues by 1.4% and to decrease non-capital expenditure by 4%.
  • Measures approved on the 29 January, as part of the Immediate Action Plan, will cut back job offers in the public sector by 90% until 2013 (ES1004019I). The 2011 Austerity Plan also proposes cuts in subsidies.

According to the government’s Stability Programme Update 2013, the combination of these measures, together with the Draft Law on Sustainable Economy (ES0912039I), will bring the deficit down to 3% of GDP and set the public debt at 74% by 2013, thus fulfilling commitments made to the European Union.

New decree to cut public deficit

However, these measures, despite meeting commitments made to the EU, were not enough to restore confidence in the strength of the Spanish economy. Days before the Economic and Financial Affairs Council (Ecofin) met on 8 May, the costs of the Spanish debt shot up alarmingly, fuelled by the false rumour that the Spanish government had asked the International Monetary Fund (IMF) for support.

Ecofin’s announcement that it would set up a €750,000 million fund to ensure financial stability and that the European Central Bank (ECB) would purchase sovereign debt, brought down the costs of the Spanish debt. However, these measures also meant Spain had to take more drastic measures to deal with its financial problems.

Spain’s new adjustment plan was received positively in the Eurogroup meeting (a meeting of the finance ministers of the eurozone) held on the 7 June. The European Commission was due to submit its report on the plan on 15 June. Measures included in the plan are outlined below.

  • Public sector wages are to be cut by an average of 5%. High-ranking officials will see their salaries cut by between 8% and 15%. Those on lower pay will suffer losses of between 0.56% and 7%. This cutback will be achieved by rescinding the pay rise of 0.3% for 2010 agreed by the government and trades unions in the framework of the 2009–2013 social dialogue.
  • Automatic increases for retirement pensions will be suspended in 2011 except for non-contributory pensions. The government says this is possible because of the increase applied to pensions in 2009 which exceeded real inflation. Thus, there will be no serious impact on the purchasing power of pensioners.
  • Workers wanting to take partial retirement will, from 1 June, have to be at least 61 years old, to have paid contributions for no less than 30 years and to have worked for at least six years in the same company.
  • Back-dated payments of dependency allowances will be withdrawn. From 1 June, there will be a six-month period to resolve outstanding applications.
  • The so-called ‘baby cheque’ will be withdrawn. From 1 January 2011, parents will no longer receive a €2,500 deduction in income tax for the birth or adoption of a child.
  • Cuts in pharmaceutical expenditure will be introduced. The National Health System will apply a compulsory 7.5% discount to the sale of medicines that are not included in the reference pricing system.
  • Debt capacity of local entities is to be limited. Long-term loans to these entities will be postponed until 2012.

This plan, which also includes labour market reforms, was expected to be approved on 16 June 2010.

Positions of political parties and unions

The government’s plan went ahead because of the abstention of the nationalist parties – the Catalan Political Coalition (CIU), Canarian Coalition (CC) and Navarrese People’s Union (UPN). All said they needed to convey a sense of calm to the financial markets. The main opposition party, the People’s Party (PP), said that it voted against the measures because of the pension freeze (which none of the other parties liked either). Left-wing parties, which also voted against the plan, demanded higher taxes to reduce the deficit, and a new taxation system for higher incomes.

The Trade Union Confederation of Workers’ Commissions (CCOO) and the General Workers’ Union (UGT) voiced their outright opposition to the measures. They say it is unjust that workers should be paying for the costs of a crisis caused by the financial sector. In protest, public sector workers went on strike on 8 June. Unions say 75% of workers took part, while the government holds that the true figure was 11%. Labour reforms are being negotiated by the trade unions with the government and employer organisations. The government hoped to have this settled by 16 June. However, the possibility of a general strike could not be ruled out if some of the conditions considered by the trade union leaders as non-negotiable are altered by the government.

Pablo Sanz de Miguel, CIREM Foundation

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