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.
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