Spain: Public Spending – Not Guilty

Falling revenues, not excessive spending at root of deficit, a new report shows

Excessive public spending is not responsible for the poor state of Spain’s public finances. Instead it is the fall in revenues that came amid cuts to spending in Spain and elsewhere. This is the conclusion of a new report by Fundacion 1 de Mayo, a union-backed think-tank, which warns that plans for further rapid and drastic cuts to public spending by the new Popular Party government will be “very socially painful and economically ineffective”. 

The study – El gasto público: un falso culpable (Public spending – not guilty) – shows that in 2007 the budgets of public bodies showed a surplus of Euros 20.1 billion. Two years later this had turned into a deficit of Euros 117.3 billion. Spending went up by 16.7% over the period, but revenues fell by 15.6%. Thus spending and revenues contributed roughly equally to the weakening finances of the state to the tune of around Euros 70 billion each.

However, the think-tank argues, if revenues had not fallen so much, the public deficit of Spain in 2009 would have been around 5%, making it among the lowest in the Eurozone, the report argues.

Historically, Spain’s public spending has been low by European standards – in 2007 it stood at 39.2% of GDP, 6.6% lower than the European Union average and 12.2% below that of France. With the onset of the crisis, Spanish public spending increased only slightly faster than the European average – 6.6% compared to 5.2%. This increase accounted for 50% of the deterioration in the public accounts, compared to 87% on average in the EU.

Thus, the study concludes: “The problem isn’t excess spending but a fall in revenues.” 

Further cuts will ‘aggravate economic crisis’

Plans to cut spending by around Euros 40 billion in the next 2 years to achieve a deficit equivalent to 3% of GDP cannot be done without cutting welfare (pensions and unemployment benefits), public services (health, education and social care for the elderly) and public investment in infrastructure and other areas of support to the economy, the report argues.

“We are not talking about austerity. We are talking about serious cuts in the people’s rights.  This won’t eliminate waste, but rather aggravate the economic recession we are heading into.”

While the report accepts there may need to be some cuts it says any move to improve the public finances must be “socially just and economically efficient”, meaning:

• those who can afford it bear the greatest burden
• that the deficit must be brought down over a sensible time period
• that spending is used to promote economic activity and
• an already depleted welfare state is protected from further cuts.

Fundación 1º de Mayo