Spain has done much –much more than what was expected by analysts and international investors five years ago- to develop its economy and successfully compete in the international economy, to have a growth pattern without any disparities and to create employment. The reforms in the work, financial and competition advocacy spheres have been ambitious and –even though they need constant review and updating-, at last, successful.
But indeed all these partial hits allow displaying with contrast and sharpness the great pending task: the structural reform of public revenue and expenditure.
The recent comments of the Minister of Economy, still acting minister today, pointing out the special sensitivity of the Spanish economy concerning changes in the interest rates, have a more disturbing background. What the Spanish economy has really displayed is that it is especially vulnerable regarding changes in credit terms, may these be produced by the change in the overall tone of the monetary policy or by abrupt movements in the risk premium on sovereign debts. In consequence, the uncritical application –almost unconscious– of the old theories of “Keynesianism in a single country” in Spain during and after the crisis has only aggravated this weakness. Assuming normally the substitution of the drop of the indebtedness of companies and families almost in a one-to-one ratio for an increase in public debt is not neutral in this sense.
One can consider the next scenario in a two or three-year perspective: (i) a Banking Union still incomplete due to the lack of a common financial backstop and (ii) a normalization of monetary policy that entails the end of the extreme intervention of the central banks on the profitability of numerous financial assets. In this context, the consolidation of significant and persistent differential risk premiums in the Spanish sovereign debt as a consequence of its high and rigid level would cause that, with independence of the deleveraging effort of the private sector, the negative effects of the toughening of the credit terms leak to the economy as a whole. This would be a burden for the economic growth potential that would cancel part of the positive effects on the long term of the structural reforms undertaken or to be undertaken. And it is enough to look at the economic and financial performance of other big countries of the Euro zone with a high and persistent public debt to see that this is neither pure theory nor blind ideology, but a real risk that must be confronted.
To avoid this risk of secular ‘sclerotisation’ of the Spanish economy due to its high levels of public debt, the ambition of the fiscal policy has to be increased in some degrees. The rhetoric of “the budget cuts” or “the austerity” is false and unproductive. All it needs is ambition to imbue this scope of the economic policy from the reformist mindset: to consider substantive structural reforms in the public expenditure and revenues (like, by the way, other countries, very European, confronted successfully and with normality in the nineties or in the beginning of the century under the banner of welfare reform). On the side of the revenues, the main outlines of reform were already clearly presented both in the FAES report “Una reforma fiscal para el crecimiento y el empleo” and by the experts commissioned by the government: simplicity and replacement of the direct taxation, especially on work, by indirect taxation, due to efficiency issues and genuine effective equity. On the side of the expenditure, Spain must definitively confront its unique process of welfare reform that allows confronting the sustainability and effectiveness challenges of a system whose current design is not compatible with the social and demographic trends of the coming decades. The given diagnose in the FAES report “Desigualdad, oportunidades y sociedad de bienestar en España” is a valuable contribution to this debate. Reconsidering the scope, functioning and means of provision of the features in the social protection system looking for greater efficiency is not cutting; it is doing justice, closing any potential gap between generations and ensuring that the public money belongs indeed to all citizens.
Translated by Clara Ayuso