Cutting deficit, Spanish style

12 May 2010

As promised in ECOFIN, the Spanish government has announced a plan to reduce the deficit. Spain’s economy has structural problems and the country has a very high unemployment rate (20%). However, the deficit and total debt figures relative to GDP are lower than the UK. So, perhaps what’s happening in Spain is a foretaste of what is going to happen in Britain, as the extent of the necessary cuts will emerge over the next few weeks and months.

The Spanish government will be cutting public spending by 15,000 million euros (i.e. €15bn) in 2010 and 2011. Public sector workers will see a 5% reduction in their wages this year, and a pay freeze in 2011. Government salaries will be cut by 15%. There will be no rise in the pensions in 2011. Child benefit, or the baby cheque, will be scrapped as of 1 January 2011. A lot of investment programmes will be mothballed or cancelled. Future tax rises are not excluded.