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Budget under tutelage

Without sufficient growth, further adjustments and higher interest payments will be needed

The draft state budget is not what the Spanish economy and the citizens of this country need at the moment. It is the product of the European tutelage to which the government has been submitted, to speed up the sanitization of public finances and help stabilize the cost of public debt in the bond markets. The problem is that the budget won't achieve this if economic growth is insufficient. What this budget bodes is a more complicated economic recovery and the inevitable frustration sparked by a failure to achieve the indicated targets for the public deficit and debt.

Governments have much more scope for action on the budget items on the spending side rather than on the revenue side, which is basically determined by tax collections. These in turn are dependent on the level of economic activity; on the generation of income by companies and households and the volume of transactions subject to indirect taxes. Even if tax rates are increased, as is the case in this budget, it is difficult to generate more revenue if activity continues to contract. The vast majority of institutions and analysts are forecasting that, in the best of cases, the recession in 2013 will be of a similar magnitude to that of this year. Compared with the draft budget's central economic scenario of a contraction in GDP of 0.5 percent, the consensus among forecasters is a fall of 1.5 percent and a rise in the jobless rate to more than 26 percent.

Apart from the recession in Spain, what also needs to be factored in is the timid recovery in the European economies, which are our main trading partners. The euro zone as a whole will barely emerge from its current recession as a result of the unnecessary and incomprehensible deflationary trend in all of the budget policies in the bloc, regardless of the scrutiny to which these are subjected by the bond markets. The IMF is right to recommend that the process of cleaning up public finances should be spread out over a reasonable period of time, not only to avoid a greater contraction in economic growth, but also for this process to be more credible.

This is the main problem with the draft budget: its ingenuousness in the best of cases and its lack of seriousness with regard to taxpayers. Neither is it a budget that is to the liking of government bond investors. In order to avoid the biggest item in government spending — interest payments — continuing to trend upward, what will be required is for the current European stewardship to transform itself into a full-blown bailout. Otherwise, we will continue in the worst of scenarios: adjustments without any payback in the form of lower borrowing costs. What is much more important right now is a dose of realism rather than proposed amendments that lack credibility.