The government of Spain has approved an austerity budget, which includes a 7.7 percent spending cuts, 15 percent cuts in departmental spending; 5 percent reduction in government workers salaries and a tax hike on the wealthy.
This will, according to superbly scheming bureaucrats, save a couple of 100s of billions and hopefully reduces the country's budget deficit from 11.1 percent of GDP in 2009, to 9.3 percent this year, and down to 6 percent in 2011.
Let’s ignore for a moment that the EU has a targeted a maximum deficit of 3 percent for its member nations by 2013 (actually it should never exceed 3%). Let’s also ignore that such calculation by (any) government has never been correct before. Let’s also, for a moment, ignore the real estate and housing bubble and 20+ percent unemployment.
Let’s only look at this suggestion and think for a moment what will happen.
Firstly you gotto wonder why they aren’t cutting down to zero or rather run a surplus, which would be appropriate and necessary. Of course this is a political choice, not an economic one. It may be a good political compromise from the elitist’s perspective. Already facing general strikes and a country in turmoil doing too much at this moment may result in real upheaval. Also it can be a good thing to keep some of those institutions and organizations the government depends on for power in a fairly good mood. However, it is hard not to contemplate as to what comes next WHEN (not ‘if’) this plan fails.
Secondly what will this do to GDP and as a consequence the recovery? At least from a Keynesian perspective this is bad since everything in the Keynesian mind revolves around GDP and keeping spending up.
GDP is a scam, totally and fully. I have covered this scam before and you can go back and read, but let’s just confirm that in lowering government spending in addition to enforcing the proposed tax hikes that will only lead to tax evasion and “rich” people moving themselves or their money elsewhere, can and will lower GDP.
Reeling from the collapse of a debt-driven construction boom, Spain entered recession in the second quarter of 2008 and posted six consecutive quarters of negative growth, counted in GDP. Although the economy grew by 0.1 percent during the first quarter of 2010, Spain’s growth prospects are poor, and with this budget it will get poorer.
The combination of negative GDP growth, rising unemployment, and a high deficit has raised concerns about the sustainability of Spain’s finances. Indeed, two international ratings agencies, Fitch and Standard & Poor’s, have recently lowered Spain’s long-term sovereign credit rating, citing the risk of a prolonged period of below-par economic growth and persistently high fiscal deficits.
This budget will in all likelihood, at least in the short term, increase this risk and so probably lower the Spanish credit rating further.
Actually I would, in this case, almost agree with Keynesians. This small and very inefficient budget proposal will lower GDP, increase the risk of getting even worse credit rating and will have very little, if any, positive impact on stability and the economy. In fact the socialist government may very well face a bloodbath curtsey of their leftie voters that will feel abandoned, betrayed and fooled. And this for measures that are wrong, have no positive impact and are really too little and too late.
Either do, or don’t. That’s what should be the motto. Instead it’s a political compromise of the worst kind.
I have before warned about the lurking housing collapse of Spain. “Economists”, useless as ever, seem to argue that the worst is over in Spain and that they need to ride out the storm. This is so wrong it is laughable.
They have borrowed and spent hundreds of billions of Euros on building projects that will NEVER be paid off. And the Spanish government is liable for most of it. Either directly or indirectly. And very little of this gargantuan scam have reached daylight. Mark my words, when this sucker blows it will blow the entire country away. And after that I see no reason for why it wouldn’t expand and become the next spark to light the fire of our humorous financial Armageddon.
The enemy class of Spain has, just as the puppet masters of every country out there has, started a spiral of doom they cannot get out of and the ONLY thing they are trying to do is to paper over the problem with small, petite, useless solutions that either will do things worse or only buy more time for them to get away.
There are a lot of problems out there. Looking at numbers coming from the US its hard to imagine them being able to keep the scam going for much longer, but they are the world’s biggest economy and have a built up a reputation over the years that will take time to cave in. Japan is in such a mess it is a miracle they are still floating. Chinas bubbles, the wars, inflation running amok everywhere and all the stimulus have just run out of steam...
Will Spain be the tipping point to get the tsunami rolling over the world? Maybe, but it’s really a crapshoot. Anyone of these fuck-ups can falter and die at any moment. All I am waiting for is that it will happen. And it will probably be sooner rather than later.
