It seems we were far too optimistic in believing that Mariano Rajoy would finally reveal the details of his economic programme in the parliamentary debate which led to him being formally elected as Spanish prime minister. Instead what we got is a carefully presented misrepresentation of what awaits us, with all the painful details still unrevealed. Supporters of the government will claim this is not true, with the announcement having been made of 16000 million euros in cuts in government spending. But this figure, with the nature of the cuts to be made still unspecified, is simply an unsustainable fraud.
It's true that the cuts figure represents the amount needed for Spain to hit the budget deficit target for 2012. But Rajoy's speech was littered with fiscal presents that make it impossible for Spain to hit the deficit target without making further huge cuts. Unnecessary reductions in corporation tax were promised together with the crazy reintroduction of tax deductions for mortgage holders. The tax on companies is only paid if they are profitable in the first place, and tax officials in Spain have estimated that the real average rate at which this tax is paid is only 10% anyway given that there are so many ways in which to reduce the burden. The mortgage tax deduction is widely credited with having been one of the factors behind the disastrous housing price bubble. If Rajoy sticks to these tax commitments, together with his promise to increase pensions, then most of the promised cuts in spending are already cancelled out by reductions in government income or increased spending elsewhere.
What this all means is cuts in spending way beyond the headline figure, or backtracking on Rajoy's few concrete commitments. A few short weeks ago it was education and health that were untouchable alongside pensions. You won't hear that any more. Despite all the talk of cutting wasteful spending, the reality is that the axe is going to fall on essential services and the employees who work in those services. All the money ripped off in those mega projects of the boom years has been safely stashed away. Usually where the taxman is unlikely to find it should the government surprise us and start to do something about the manifest injustice that leads to so many of those who have the money not being asked to make any contribution towards the cost of the crisis.
The bad news doesn't stop here. Nobody seems very confident about Spain hitting the deficit target for 2011, mostly because of the still unconfirmed deficits in the regional governments. Each 1% of variance above the target is more or less equivalent to another 10000 million euros in cutbacks. Lets assume that 1% variation and a generous estimate of a similar amount on the tax cuts; that's a not very trivial additional 20000 million euros of cuts on top of what Rajoy has already promised. In total well over twice as much as those cuts already made by Zapatero's government, which of course the PP opposed so vehemently when in opposition. Whatever happened to the Madrid PP's petition against the rise in VAT?
The reasons why the PP will not reveal the true scale of the cuts are more to do with political strategy, rather than the economy. Andalucia holds regional elections in March, and the PP has high hopes of winning control of the region after decades of PSOE control. So the full reality of the cuts the PP intend to make has been put back until after these crucial elections, when suddenly we can expect the veil to be lifted and reality will bite hard. The outlook for Spain in 2012 is tremendously grim, unemployment is going to continue to rise well beyond the symbolic figure of 5 million and there is no prospect of economic recovery.
It's wake-up time, particularly for those PP voters who were seduced by the comfortable but cynical illusion that all it would take was a change of government for Spain's economic situation to improve. The recognition yesterday by the new economy minister, Luis de Guindos, that Spain is heading back into recession just makes all this pain for no gain seem even more absurd. This is no natural "business cycle" recession. It's a deliberately provoked recession which will only be made worse by the spending cuts. There are those who will argue that it's a sovereign debt crisis, or even those who still prefer the morality fairy tale of spendthrift Mediterraneans punished for their years of high living. But the Christmas gift of huge amounts of cheap money the other day from the European Central Bank to the banks tells the real story. Those who warned that failure to deal with the causes of the financial crisis would lead to it continuing were right. Those who scoffed at them were disastrously and stupidly wrong.
There is possibly somewhere a lunatic, safely locked up and restrained, who regards the bombing of Hiroshima as an example of progressive town planning and slum clearance. Those who insist on regarding the deliberate destruction of productive economic capacity as a process of "structural reform" are still walking the streets. You need to have a truly impressive resistance to reality to still believe this kind of interpretation with everything that has happened in the last few years. But then the faith based economics which are so dominant these days accept no examination of the evidence. The coming economic miracle is just kicked repeatedly further into the future. Any other economic model which produced such dismal results would have been binned long ago.