STRATOSPHERIC SPAIN AUSTERITY - AN ABSOLUTE ANALYSIS

To: The Right Hon’ble Prime Minister of Spain Mr. Mariano Rajoy Brey 

From: Athinarayanan Sanjeevraja 

Date: September 11, 2012

RE: Stratospheric Spain Austerity – An Absolute Analysis 

     Suggestion: 

Good Morning Mr. Prime Minister. Your government published a proposal to raise taxes and reduce government spending for fiscal consolidation by 56.4 billion by 2015. Most of the commentators and economists including Nobel Prize winning economist Paul Krugmann argued that austerity will not work in Europe. But I believe austerity will work in Europe if it ensued in the context of systemic change. For instance, your austerity should support long term effects on the health of the economy particularly fiscal consolidation, balanced budget, increasing savings and investments, continued improvements in productivity and exports. I would like to recommend 70 percent government spending cuts and 30 percent tax increases to ensure fiscal consolidation and bring public finances back to sustainable path. The main objective is to reduce the size and scope of government spending. Most of the commentators and economists argued that increased government spending drives up growth. It is my belief that increased government spending funded by borrowing enlarges the debt, thus protracting the pain, increased spending funded by printing more money drives up inflation, increased spending funded by tax increases diminished the private sector growth. In Spain, the more government spending is worse the economic situation but we should not cut government spending on public works because unemployment is stratospheric in Spain. Furthermore, we should not cut public spending on education and R & D.   

Your government is borrowing more because tax revenues have fallen precipitously in Spain. Most of the commentators and economists argued that there are so many reasons to oppose to increase tax in Spain due to current eurozone crises. It is my belief that tax increases will not damage Spain economy if it needs to be considered carefully. The Spain economy is already in recession so tax increases would probably produce less revenue if it is not considered carefully. For instance, eliminating all tax subsidies for all new and existing projects will generate more tax revenues. Spanish Industry Minister José Manuel Soria cut all subsidies for new projects relating to renewable energies. But it should be applicable to existing projects too if it is possible. Also, cut subsidies for all industries except agriculture. In addition, any tax increases should not affect private sector growth. If tax increases affects the private sector growth, it will diminish the company cash flow. It will reduce company savings and investment/expansion so badly. I believe in moderate increase in consumption tax to raise tax revenues. Your government already increased VAT from 18% to 21%. It is high. Higher VAT disappointed growth for Spain. I think, VAT below 20 percent is acceptable. The most important type of austerity required is colossal tax increases for the rich. Furthermore, moderate increase in recurrent taxes on immovable property, increase tax on alcohol drinks, tobacco products and luxury items like cars, mobile phones, tickets for cinemas, theme parks etc to ensure fiscal consolidation of Spain and raise more tax revenue in order to restore public finances.

Mr. Prime Minister, your government proposal of austerity did not create confidence in the market because it is not necessary cutting government spending and increase tax bring economic growth and reduce public debt. If a country with strong entrepreneurial sprits like Germany, the private sector should replace the government demand. But that’s not the case in Spain. The private sector in Spain is unwilling to invest because there is no demand in the economy. If the economy was thriving, the private sector is willing to invest. But Spain is in recession, the private sector confidence is not there. Your government should take credible measures to create confidence in the market to reduce the public debt and instigate supply side confidence so that companies would then invest, hire and produce goods more. This would create more employment, income and consumption. Also, this would build confidence among investors and public and this, in turn, will lower interest rates and borrowing costs of Spain.   

Mr. Prime Minister, Spain should focus on both short-term and medium term structural reform along with austerity aiming at corrective macroeconomic imbalances to stimulate economic growth. Spain structural reforms should effort to correct economic imbalance in the framework of European law. Spain structural reforms includes ensure both short term and medium term fiscal sustainability, restructuring and recapitalisation of banks, enhance public employment service, administrative rationalization, restrain age-related spending, stop the programmes to support construction of futile rail tracks, airports, highways, housing skyscrapers etc. for short term and call off fiscal amnesty immediately. I knew that Spanish government committed to the programme of fiscal consolidation and structural reforms that will earn Spain confidence of partners of EU. But structural reforms should be translates into practice, thereby setting the Spain for economic growth.    

Let me conclude Mr. Prime Minister, times are tough in Spain. Your government and businesses are battling the crises. The key to Spain’s economic growth lies in your hands. If you do your duty and do right with political will and deep commitment you can make Spain a better place for all. I am absolutely confident that your government will set an ambition for fiscal consolidation by 56.4 billion by 2015 and setting the economic growth for Spain. Let’s keep up the momentum, your government is doing right thing in the conviction to get the Spain’s economy on track.

Thank you.