Austerity in Spain?

Juan Carlos Hidalgo at the Cato Institute investigates claims that Spain has been suffering from “austerity”

Writes Mr. Hidalgo, (bold emphasis mine)

There is a wide consensus that Spain’s economic troubles are the result of an enormous housing bubble—even bigger than the one that hit the U.S.—that burst in 2008. Just the year before, Spain boasted healthy fiscal indicators: a general government budget surplus of 1.9% of GDP and a gross consolidated debt of just 36.2% of GDP. However, once the bubble burst, government revenues collapsed and stimulus spending was injected into the economy, resulting in a fiscal deficit of 11.2% in 2009 and a gross debt that has increased over 30 percentage points of GDP in just 4 years.

Paul Krugman and The Economist argue that this evidence shows that, unlike Greece, Spain wasn’t fiscally profligate. However, the devil is in the details. Spain did run budget surpluses prior to the crash, but those surpluses weren’t caused by restrained government spending, but by ballooning tax revenues (thanks to a growing housing bubble). If we look at total government spending in the last decade, we can see a steady and significant rise until 2009:

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Government spending in nominal terms increased at an annual rate of 7.6% from 2000 to 2009. Ryan Avent at The Economist says that “the push for austerity began in 2010,” and thus we have to look at nominal spending after that year, when according to Avent, it fell “substantially” due to austerity measures. In reality, it went down by just 1% in 2010 and a further 3.6% in 2011. If these cuts seem “substantial” to Avent, then a yearly average increase of 7.6% for almost a decade must be staggering.

Moreover, if we look at spending in real terms, using constant euros from 2000, there hasn’t been any decrease in the level of government spending.

If we look at government spending as a share of the economy, Spain appears as fiscally prudent: Spending was 39.2% of GDP in 2000 and exactly the same figure in 2007. However, as has been noted by Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Juan de Mariana Institute in a recent Cato study, “the data should be interpreted with caution, given that the GDP was growing at an artificially high rate.” The point is proven by the fact that when the economy came to a halt in 2008 (it grew by just 0.9%), government spending as a share of GDP leapt 2.3 percentage points to 41.5% in just one year. Government spending as a share of the economy remained constant during much of the 2000’s not because the government was spending too little but because GDP was growing too fast.

Moreover, once the crisis kicked in, government spending as a share of GDP reached a peak at 46.3% in 2009 (due to a combination of still more stimulus spending and a contracting economy). It later fell to 43% in 2011, still a higher share than in 2008. Government spending in Spain has indeed come down in the last two years, but not in a dramatic fashion as some people would have us to believe.

What about taxes? As has been the case in Britain, France, Italy and Greece, in the last two years the Spanish government increased taxes to tackle the soaring deficit: personal income tax rates went up in 2010 and two new brackets of 44% and 45% were introduced for higher incomes. Tax credits to self-employed workers were revoked. The VAT rate went up from 16% to 18% and excise duties on tobacco and gasoline were also raised. All these tax increases took place before the large tax hike introduced this year by the conservative government of Mariano Rajoy, which turned Spain into one of the highest taxed countries in Europe (and explained at length in this Economic Development Bulletin).

In short, austerity in Spain, described by Paul Krugman as “insane,” consists mostly of significant tax increases and timid spending cuts.

So Spain’s economy has been enduring economic strains hardly from spending cuts but mainly from HEFTY TAX INCREASES, rigid labor regulations and the welfare state.

On asphyxiating labor environment the Economist noted last February,

Spain’s labour laws, which date back to the Franco era, have condemned half the workforce to unemployment or to temporary jobs while the rest enjoy ironclad contracts and huge redundancy pay-offs. The new law blurs this insider/outsider divide and may thus get more people into stable employment. The decree comes on top of a January agreement by unions and employers to limit pay rises over the next three years. Mr de Guindos thinks most Spaniards see the need for labour reform. But its success in terms of growth may depend on unions’ choice between protecting jobs and keeping up their members’ pay.

The same statist FALSEHOODs have been thrown to Greece, where supposed “devaluation” from an “EU exit” would have posed as “elixir” to Greek economic woes.

Yet the ramifications from such absurd mainstream propaganda has been to SPUR a stampede out of the Greek banking system or systemic “bank run” or “capital flight” into safe havens as Germany and the US, as Greeks feared the loss of savings from forcible conversion of their euros to “drachmas”.

And the same tax hike prescriptions from statists has led Greeks to drastically avoid paying taxes.

In short, statist medicines have been blowing up right smack on their faces.

Yes, polls have it that 80% of Greeks want to stay in the Euro!!!

Statist imbeciles engage in deceptive phraseology to promote their political religion. As George Orwell once wrote,

In our time, political speech and writing are largely the defence of the indefensible... Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness… Such phraseology is needed if one wants to name things without calling up mental pictures of them…The inflated style itself is a kind of euphemism.

The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.

False prophets, these statists, are.