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Wednesday, October 02, 2013 2:00 PM


Pensions, Unemployment, Interest on Public Debt, Consume 54% of Spain's Budget; Debt Hits 100% of GDP; Expect Plan "B" or Plan "C"


On Monday, Spain reported that its debt-to-GDP ratio would hit 100% in 2014.

Spain's public debt will soar to nearly 100 percent of output at the end of 2014, the government said Monday, despite massive spending cuts that have triggered angry street protests.

Spain's ratio of debt to gross domestic product (GDP) will hit 99.8 percent at the end of next year after rising to 94.2 percent at the end of 2013, higher than previously forecast, according to details of the government's 2014 budget presented in parliament.

The debt ratio has soared from 40.2 percent of GDP in 2008, when the end of a decade-long property boom triggered an economic slump that caused unemployment to jump and tax revenues to plunge.

Prime Minister Mariano Rajoy's conservative government had forecast in its 2013 budget that the debt-to-GDP ratio would stand at 90.5 percent at the end of this year.

Pensions will rise by just 0.25 percent in 2014, the minimum allowed under a pension reform approved by the cabinet on Friday that will stop indexing payouts to inflation.
Where's the Money Going?

Here's an interesting chart of Spain's budget allocation courtesy of La Vanguardia.



Via Mish-Modified Translation 
Pensions, unemployment and interest payments on the public debt eat more than half of budget expenditure planned for 2014, as stated in the draft State Budget (PGE ) for next year. Specifically, these three items totaling  €193.801 billion, representing 54.6% of total expenditure in the budget provided, totaling  €354.622 billion, 2.7% more than in 2013.

Spending on pensions, unemployment benefit and interest of the debt, the largest items along with transfers to general government, will increase next year by 3.5% compared to 2013. The biggest spending budget is pensions, which are carried  €127.483 billion, representing growth of 4.9% over the previous year and 35.9% of total expenditure. The government plans to raise pensions by 0.25% in 2014.

Meanwhile, the unemployment starting with an allocation of  €29.727 billion euros, up 10.1% and 8.4% of the total. As for public debt, interest will amount to  €36.590 million euros, 10.3% of total expenditure, down 5.2% from 2013. Interest is equivalent to 3.5% of GDP.

Finance Minister Cristobal Montoro, says "next year we will not ask taxpayers to pay more taxes." Montoro stressed that budgets are based on the "reliability" of economic recovery, so that rules out a "plan B" that involves tax increases.
Expect Plan "B" or Plan "C"

Expect plan "B" or Plan "C" because there is no economic recovery.

Eurointelligence has additional details ...

  • The budget does not contemplate raising tax rates, and includes tax incentives for entrepreneurs, to encourage self-employment;
  • Public sector wages will be frozen, though the Summer and Christmas extraordinary payments won’t be withheld;
  • The number of pension recipients will grow by over 5%, and outlays on unemployment assistance are expected to grow by over 10%;
  • Ministries will have their total budget reduced by nearly 5%, though Interior, Education, Employment, Industry, Agriculture and Economy will see budget increases;
  • Government investment drops by over 7%, and in particular infrastructure investment will be reduced by over 9%;
  • The net balance received by Spain from the European union will be a negligible €148m.

What the Public Thinks



Image from Yahoo! News (first link at the top).

Recovery? What Recovery?

Eurointelligence writes "What we are seeing in the eurozone cannot really be described as a recovery, but a return from negative growth rates to low positive ones – without any near-term prospect of a genuine recovery. The latter would require a significant drop in unemployment. Without a resumption in bank lending, given the continued constraints on fiscal policy and a stable but lacklustre global economy, it is hard to see where this growth is coming from."

Bingo. There is no recovery and there will not be one. The structural problems are immense, and the euro itself is a huge part of the problem. In addition, tax hikes have been counterproductive.

What's really needed is work rule and pension reform.

Here is the pension and work rule reform progress to date: Italy has seen no reform, Spain very little, and France is heading in reverse.

It's ridiculous to expect a recovery with those headwinds and zero net progress on badly needed structural reforms.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Copyright 2009 Mike Shedlock. All Rights Reserved.
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