Economy

Spanish Austerity

One of the benefits for Labour of not getting into power, is that Labour politicians have avoided having to take the responsibility of taking hard decisions, and instead can tweet away about Tory/LibDem cuts. Here’s an example:

800,000 babies each yr will miss out on Child Trust Fund cos of Tory broken promises. Email if affected: team@davidmiliband.net

Even as someone who voted Labour at the last election, I find it hard to take any such comments seriously when emanating from politicians who were in government as the debt was run up. As Kamm states:

Government needs to stabilise economic activity by monetary and fiscal policy. To do that, it should balance the budget over the course of the business cycle. So it should build up surpluses when the economy is expanding in order to run deficits – beyond those that would normally arise from the contraction in output – and boost demand in a recession. This obviously is not a description of what Gordon Brown did as Chancellor after 2002, because he disastrously believed he had abolished the business cycle. The share of public spending in national income rose from just under 40 per cent when new Labour took office to 48 per cent when the credit crunch arrived. That’s an extraordinary figure for an economy that was growing briskly throughout that time.

He also makes some points about the Lib Dems conversion to fiscal responsibility after Laws and Cable injected some sense. However, let’s look what is happening in Spain under a socialist government. Can they ignore the debt? The answer seems to be no.

Zapatero’s government is struggling politically because of the crisis. Parliament last week approved its key euro15 billion ($18 billion) package of spending cuts by a bare one-vote margin.

The Socialist government later said this belt-tightening had forced it to revised downward its forecasts for economic growth and job creation for the next few years.

On Friday Fitch Ratings gave Spain the second downgrade of its credit rating in a month. The agency said the government’s deficit-cutting drive would weigh on economic growth.

Spain is not the UK, but the seriousness of the situation in Spain should give pause for thought to those who think the UK’s attempts to tackle debt are harsh or unnecessary, although “ultra-austerity” in Spain may not save the day.

The subtext of Fitch’s 32-page report shows Mr Zapatero’s self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or “internal devaluations” – being imposed on southern Europe’s humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. “Fitch believes the risk that economic growth will fall short of the government’s projections,” it said.

El Pais spoke of a “perverse spiral” in its editorial. “The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence.”

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