Friday, January 13, 2012

The Return Of The Invisible Man

Rumours that Mariano Rajoy had been kidnapped were clearly exaggerated. The great man finally emerged from hiding this week to give his first media interview since allegedly being elected as Spanish prime minister in December. There is even the possibility that he may deliver a press conference in the not too distant future, although it's unlikely on past form that he will accept any questions. Despite this silence, Rajoy still had the nerve in his first interview to claim that he would not be hiding from the crisis.

The pre-electoral strategy has been continued, and it seems that Mariano doesn't really want anyone to notice he's there. It wasn't him who had to explain the government's first package of tax increases and spending cuts this week in parliament. That package marked quite a turnaround from the unsustainable position that Rajoy's administration had held even after the election. Who is in charge of the Spanish economy? Officially its Rajoy, that's why there is no vice premier in charge of economic affairs. But then we have ex Lehman Brothers boss Luis de Guindos as economy minister and Cristóbal Montoro as minister for taxing people. Rumours of tensions between the two ministers have already emerged, and it is said to be Montoro that claims the seat at the head of the table for meetings on the economy when Mariano is off doing whatever it is he does.

It's funny how all that convenient dogma about reducing taxes to increase overall government income goes so quickly out the window when it comes to the crunch and the government needs to raise some serious money. Likewise all the rhetoric about squeezing the middle classes, which the PP used so extensively when the PSOE administration raised taxes last year. A fine collection exists of declarations, many of them quite recent, from senior PP figures on just how wrong it is to raise taxes to deal with the consequences of the crisis.

They now try to hide the dramatic turnaround behind the argument of the "herencia recibida", that the outgoing government concealed the true nature of the budget overshoot from them. The problem is that by far the greatest part of this overshoot comes from the regional governments, and which party controls almost all of these? The Partido Popular of course. It's possible, though unlikely, that they don't talk to the people in charge of their regional governments. It's also possible that the PP regional presidents have lied to the national leadership about the state of their finances. That has a more believable ring to it.

Despite the apparently progressive nature of some of the tax increases, the overall burden of paying for the crisis still falls on wage earners and the recipients of public services that are being slashed. The seriously wealthy in Spain don't pay income tax, they have numerous ways of getting around that. The only promised tax cut that has still been maintained is the potentially damaging subsidy from those who don't have mortgages to those who do. An odd thing to do when the government is trying to force the banks to accept the overdue downward revaluation of their unwanted property assets.

Meanwhile the association of tax inspectors has calculated that all of us who do pay our taxes are paying an extra €800 a year to fill the gap left by those who don't. They also say that reducing the submerged economy by 10% of GDP (probably less than half of what it currently takes) would increase government revenues by €38500 million, a figure which very nearly matches the estimate of total cuts required for this year. Instead the government has opted for what they present as an ambitious anti-fraud programme which, er, has a target 20% below that which was achieved last year.

At the same time the spending cuts are accompanied with widespread press coverage of all that wasteful spending from the boom years. The problem is that its not the airport without planes that is closing in Castellón as a result of the cuts, it's the schools. Nor do the cuts seem to be affecting a Valencian Formula 1 contract that is almost as expensive to cancel as it is to continue. This latter region, controlled for years by the PP and systematically ransacked in the last decade, is emerging as the leading candidate for basket case status. It seems that the national government had to step in to guarantee loans there in the first week of January. 

The worst is still to come. The combination of tax increases and budget cuts so far announced only accounts for around €15000 million of the estimated €40000 million total for the year. As predicted, the main pain will be announced only once the Andalucian regional elections (to be held on March 25th) are safely out of the way. Despite the servile pro-PP press coverage about how Rajoy's actions have stabilised the situation for Spain, this in reality has far more to do with the European Central Bank throwing vast sums of cheap money at the financial system. The ratings agencies have already given signs that they intend to keep up the pressure. How long will it be before a Spanish downgrade is needed because of the poor prospects for growth that result, of course, from the very same policies that the ratings agencies themselves have advocated? The casino will be the last place to turn the lights out.

No comments: