By Manuel Lago
Prime Minister Mariano Rajoy’s economic policies are leading us to collective suicide. They are reducing living standards and working conditions of the 99% while also failing miserably in their formal objective of stabilizing the economy. There are many reasons behind this serious error and among them is one of diagnosis. Rajoy maintains that all his cuts are essential in order to pay Spain’s public debt. And that to pay the debt is the ultimate goal. Yet this statement is absolutely false. Because the general government debt is not paid, ever, rather it is refinanced and absorbed through growth.
Rajoy, who knows little about economics, also knows little about his own history. In 1996 when José María Aznar won the election, the Spanish public debt was €323,920 million, a figure equivalent to 66% of gross domestic product (GDP). Eight years later, in 2004 when Rajoy lost the elections for the first time, the public debt was only 46% of GDP, a reduction of twenty points. And no, it wasn’t that Aznar paid the debt left by socialist premier Felipe Gonzalez. Because debt in absolute terms was not only not reduced but continued to grow, reaching a record high at the time of €389,942 million.
What happened then? Well, the Spanish economy grew, and a lot, in those eight years, thus absorbing the debt. While debt increased 20%, GDP increased 72%. The result was a reduction in the debt ratio, which means that by having more resources you reduce the cost of debt. Indeed, and just in case it goes to Rajoy’s head, in José Luis Rodríguez Zapatero’s first term things were even better and the debt fell to a record low of 36% of GDP in 2007.
Let’s learn from our history. The most effective formula for dealing with debt problems is growth. It was with Aznar and Zapatero and it has to be now. Rajoy’s strategy of paying down debt in order to reach a budget surplus is doomed. In a zero-growth scenario it would take ten years with a surplus of 2% to reduce debt to 60% of GDP. But achieving that outcome would not only involve socially unacceptable budget cuts, it’s just not possible. Despite Popular Party fairy tales, each and every one of the eight years of Aznar’s administration the public accounts posted a deficit. In no year was there a surplus. Our experience shows therefore that Rajoy’s strategy is not only unfair and painful for society it is also doomed.
The solution is growth. With a nominal GDP growth of 3%, much lower than the growth in the past 20 years, the debt would be below 60% in just five years without the need for a surplus, simply with balanced accounts. Moreover, if the nominal GDP grew at the same rate as the average of the past 15 years we could reach that goal with a deficit of 2%. But Rajoy would have to show that he not only knows how make cuts but is really capable of managing the country’s economy to achieve growth.
Manuel Lago is an economist for the 1st May Foundation (Fundación 1° de Mayo) of the Workers Comissions trade union central
Translation by Revolting Europe