Spain Introduces 'Crisis Budget' Of Savage Austerity Cuts

A 20 percent cut to welfare. A new -- even higher -- sales tax, and a new tax on lottery winnings. A fresh round of layoffs among employees of government agencies and government-supported enterprises. The obliteration of public support to the arts.

This is what austerity looks like.

Following two days of massive, violent protests outside the gates of the national palace, the Spanish government unveiled a new budget for 2013 on Thursday that was heavy on new cuts, a fact that almost certainly ensures further civil turmoil in a country where the unemployment rate currently stands at 24.6 percent.

Overall government spending would decrease by 8.9 percent, the Spanish government announced, mainly through layoffs of public sector workers and cuts to monies provided to regional governments. The one area where the government will splurge: oversight. While presenting its budget proposal on Thursday afternoon, government vice-president Soraya Sáenz de Santamaría noted that a new agency would be established to make sure budget limits were being kept, particularly by semi-autonomous regional governments, which have notorious spendthrifts in the past.

Prime Minister Mariano Rajoy, in New York to address the United Nations, described the then-expected cuts Wednesday as entailing “a lot of sacrifices distributed … evenly throughout the Spanish society.”

“We are all living the adjustment.”

But the initial reaction from political pundits in Spain was that the cuts were anything but even. A reporter at the press conference where the budget was announced asked Spanish Treasury Minister Cristobal Montoro how the government could claim “it’s not the citizens that are paying” when sales taxes are being hiked by 13.2 percent at the same time that corporate taxes are being cut by 3 percent.

“Of course the citizens are the ones paying. That’s inevitable,” Montoro said. “We are all living the adjustment.”

Spanish media also focused on the draconian cuts to welfare payments for the elderly and disabled, slashed by 20 percent, and the fact public worker salaries will again be frozen -- for the third year in a row. And that will be for those still lucky enough to hold a job in government: Cuts amounting to €40 billion will see many public servants join the swollen ranks of Spain’s unemployed.

Also disproportionately hit, according to various Madrid newspapers: funding for the arts. The national Museo del Prado, one of the world’s finest collections of European art, will see funding cuts of 30 percent, bringing the total budget allocated to that museum to less than 25 percent of what it was in 2009. The national library system will not receive a single euro to purchase new books next year.

The government’s tourism office, for its part, will see its budget cut by 40 percent, and a popular tax deduction for first-time home-buyers will be eliminated.

“Social spending”

Presenting the budget Thursday, government officials attempted to put a brave face on the cuts, noting, for example that in spite of increased austerity, over 63 percent of the budget was accounted for in “social spending.”

Finance Minister Luis de Guindos focused on the fact that pensions for retirees had not been touched, and he pointed out that rather than raise the retirement age, the government was instead focusing on discouraging early retirements. But even the good news about leaving retirees untouched was tempered by the admission that the Treasury would have to dip into the retirement fund to make up for €3.6 billion in its shortfall.

Drowned by figure after figure on new cuts or taxes -- at one point, when asked by a journalists about the deficit figures, Minister Montoro quipped that “there are so many” -- were some of the more positive announcements, which are supposed to stimulate the economy, such as a “green” vehicle incentive scheme and a dairy industry reform, were mentioned with little fanfare.

A contentious suggestion by Montoro that growth in the financial industry “for Spain to swiftly become an exporter of financial resources to the rest of the world” was ignored by the journalists at the press conference.

“Crisis budgets”

Instead, reporters focused on the equally controversial economic assessments the government was using for its revenue and spending predictions. Spain is now officially expecting a drop in GDP of 0.5 percent next year, which is less than half the decline that private economists estimate. The government also said that it does not expect unemployment to rise from current levels, even if job losses mount.

Journalists at the press conference savaged the ministers on those unorthodox assumptions, with one even facetiously asking if there would be a revision of the budget “ten days from now, as occurred last year.”

“These are crisis budgets meant to get us out of the crisis,” Sáenz de Santamaría responded.

The response to the news outside of Madrid was neutral to slightly positive.

Financial markets, which had dipped prior to the announcement of the budget, were mostly unchanged. But European officials, who are expected to negotiate a bailout with Spain in the coming weeks, applauded the announcement.

“The reforms are clearly targeted at some of the most pressing policy challenges. Further enhancing the flexibility of product and labour markets will indeed be critical to boost growth and employment and to support fiscal consolidation,” Olli Rehn, European Commissioner for Economic and Monetary Affairs said in a statement.

“Slipping”

Back in Spain, partisan politics seemed to have the day, with the reaction to the government’s austerity budget, even before it was announced, bordering on toxic.

“Spain is increasingly slipping out of their hands,” opposition Socialist leader Alfredo Pérez Rubalcaba said Wednesday in Congress. “There are clear fractures in Spain, and the one I’m most worried about is social fracture.”

The government responded to those comments by citing numbers for the budget deficit of the previous Socialist government, where Rubalcaba served as vice-president, and explaining it was essentially trying to make up for years of irresponsible governance under opposition rule.

Citing numbers on budget shortfalls, revenue collection and GDP growth under the previous government, Sáenz de Santamaría gave the dry statistics a dramatic flare by declaring “that is what it looks like when the government slips out of your hands,” after ticking off each metric.

“With the work of this government, we’re trying to rescue a country that the government [Rubalcaba] was part of, let down.”