The Government of Sanchez has presented on Monday the draft of Budgets that Brussels has to review in the next 15 days. In this plan, it commits to a structural adjustment of 0.4% of GDP, about 4,850 million, which is based above all on tax increases. As it is a structural reduction, this is calculated by subtracting the income resulting from the economic improvement and the new expenses. That is, any new disbursement would require additional measures to the 4,850 million pledged to Brussels. Once the public deficit is below 3% of GDP this year, Spain will leave the special protection mechanism of the EU, the so-called Excessive Deficit Procedure. And in this new scenario, this structural adjustment will be much more important.
According to the numbers offered at the press conference, this plan includes an increase in spending of 5,098 million, and an increase in revenues of 5,678 million. That is, an adjustment that only reaches 580 million. In addition, the Treasury explained that the rise in the minimum wage will involve an additional 2,000 million collection of contributions, raising the adjustment to 2,580 million. Some economists dispute that figure. The reasons: the rise of the minimum wage, of 22.3%, could have negative effects on employment and promote the underground economy. "The literature on this is mixed. The increases of 2004 and 2017 had no impact, "argued Economy Minister Nadia Calviño.
Despite remaining in an adjustment of only 2,580 million, the Government has declared this Monday that this budget plan includes 0.4% of GDP in structural adjustment. According to calculations by the Fiscal Authority, the Government needs this adjustment to lower the budget gap in 2019 to 1.8%. If not, and only with the income from the economic improvement, the 2019 deficit would be 2.2% of GDP. The Bank of Spain and the IMF estimate the same.
It is true that the Government has included measures to increase the collection: 1,776 million foreseen by the increase in corporate tax; 1,200 for the Google rate; 850 for the stock tax; 670 for diesel or 328 for the increase of income tax to high incomes, among others. With the highest contributions for the minimum wage, the income measures total 7,400 million and raise the tax burden from 38.5% of GDP to 39.1% in 2019, still far from the European average.
But the government has also declared increases in spending that partly neutralize these taxes and that, in principle, should be compensated to offer Brussels that adjustment in net terms of about 4,850 million. Among the expenses: 1,088 million for pension increases; 536 million in scholarships; 515 million for dependence; 300 million for the improvement of paternity leave; 323 million for the subsidy for people over 52 years old, etcetera. These numbers do not include the costs of other measures that could inflate disbursements even more. For example, the elimination of the pharmaceutical copayment, universal health, improvements in the ratios of teachers by students or increases in public employees reflected in the agreements with Podemos. Despite all these items, when calculating the adjustment, the budget plan only recognizes spending measures worth around 2,400 million euros.
Risk of non-compliance
In its recommendations approved by the council of European leaders, Brussels actually demanded an adjustment of 0.65% of GDP, some 8,000 million. However, once the deficit is below 3% of GDP and therefore outside the EU's corrective procedure, the rules are more relaxed and some margin for non-compliance is allowed. Specifically, up to a total of 0.5% of GDP distributed between the structural adjustments of this year and next year could be breached. So the Government intends to take advantage of this margin to breach the 0.65% adjustment and leave it alone at 0.4% of GDP. However, as soon as he presented the budget agreement with Podemos, the accounts, from the beginning, did not match. It seemed that all the tax increases were being eaten by the new committed expenditures and, consequently, there was not a minimum structural adjustment with which to satisfy Brussels.
Even so, sources of Finance and Economy insisted on Monday that the budget plan offered that structural adjustment of 0.4%. On the income side, the accounts cast some doubt on whether they will be able to compensate all the new expenses and, in addition, achieve the aforementioned structural adjustment. The collection will grow at the highest rate since boom real estate and a little more than this year despite the economic slowdown: 5.7% compared to 5.6% this year. It is true that tax increases and inflation will help improve the cash. But even then hypothetical tax hikes are being projected and whose revenues may well not be achieved. The employers CEOE said Monday that it considered improbable that the increase in revenue planned by the Executive is obtained. On the other hand, the Fiscal Authority sees these forecasts as "feasible".
One problem is that much of the improvement is expected by corporate tax. And companies usually react to avoid higher payments. For example, avoiding the repatriation of dividends that will now be taxed at 5%. Another Achilles heel is that 828 million are targeted for the fight against fraud. On the one hand, the experts recommend that these types of initiatives not be counted in the accounts. On the other hand, the Tax Agency has already had two consecutive years with downward results after having almost doubled during the crisis.
On the part of expenses, the question is whether these are well reflected. Only measures worth 2,400 million euros are recognized. In fact, the nominal increase is similar to that of this year despite all the announcements agreed with Podemos: once the extraordinary items have been eliminated, spending increases by about 19,000 million in both 2018 and 2019. In percentage of GDP, disbursements they even decrease from 41.2% of GDP in 2018 to 40.9% in 2019. And in part this happens because public investment falls again after last year was finally raised somewhat by the PP. In summary, while the expenses drawn are safe, the incomes seem more uncertain, say the economists consulted.