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Mish's Global Economic Trend Analysis

Promises Go Out the Window as Spain Undertakes Huge Tax Increase Coupled With Biggest Budget Cut in History; Depression in Spain will Worsen

Posted: 01 Jan 2012 01:53 PM PST

Courtesy of Google Translate, please consider Rajoy approves the biggest cut in history and a large tax increase

Everyone knew it. Above all, Mariano Rajoy , who had already pointed to the environment for months that the deficit would be 8%. Not counted in public, but privately the PP did not talk about something else. And yet, throughout the campaign, and the investiture debate, said the PP government would not raise taxes. But at the moment of truth, the vice president, Soraya Saenz de Santamaria , and Rajoy, who avoided appearing, announced the second largest tax increase in recent history of Spain. And the biggest cut in public spending of democracy in one fell swoop: 8,900 million euros.

And that, he said, is only "the beginning of the beginning." The vice president announced that the estimated deficit will go to 8% , two points above the 6% expected, mainly because of the autonomous communities. She and the finance minister, Cristobal Montoro , dropped the previous government the responsibility for not having told what the situation was real to them or the Spanish.

This new deficit figure implies that the total cut to achieve the 4.4% in 2012, will be more than 36,000 million. It was the figure that ran for months in the PP-and well-published, but Rajoy made the debate with the official inauguration: 16,500 million. Before happened in Portugal, where the Conservatives won the election promising not to raise taxes and then did the opposite. Now comes Spain.

Rajoy promised until the last moment, even in the investiture debate , it would not raise taxes. "I will keep my election commitments," he repeated. "The greatest effort can not lie with the citizens, has to be from the Administrations" he said at the inauguration when asked if he would raise taxes.

Politically, the package is very measured to launch a very clear message: the cuts are huge, brutal, affect everyone and no doubt deepen the recession even Guindos ruled out reaching a fall of 2% of GDP, but to change the tax increases are progressive and are concentrated in high incomes.It has sought to tap equity without VAT, a tax is not progressive.

While the top rate of income tax in the new section to be created from 300,000 euros, up seven points at once, something unheard of, and will arrive in some autonomous-advancers his leg while the PSOE-ruled up to 55 %, a level high even by European standards. The Government also tried to point out that higher capital income is a six-point rise. And the rise in property tax is also designed especially for those with more expensive properties.

They are so strong that increases Guindos Montoro and insisted on trying to limit their impact: "They are temporary, are valid only in 2012 and 2013," he repeated.

Depression in Spain will Worsen

With those tax hikes and budget cuts, Spain is just back to where it claimed (lied) to be a couple months ago.

In theory these cuts will put Spain on target. In practice they won't. Unemployment rate is already 22.8% and it will rise. Spending will plunge and so will estimated revenues from VAT and other taxes. Expect more business bankruptcies as well, and those bankruptcies will impact the solvency of banks. In short, these moves will backfire and the depression in Spain will worsen.

Raising taxes at the onset of a depression or in a severe recession is one sure-fire way to make things worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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