The Economic Impact of the Political Uncertainty
Spain has faced four elections in as many years, something unknown in neighbouring countries, and the economic consequences are by no means insignificant.
Spain is facing a slowdown more severe than that forecast by the government only a few months ago. In July 2019, the Minister for Finance issued an assurance that consideration was being given to an upwards revision of the growth forecasts. Only two months later, the Bank of Spain curtailed the forecast of growth during 2019 by over 16%, along with the expected growth for 2020 and 2021. The European Commission revised downwards its forecasts for growth to 1.9% in 2019 and 1.5% in 2020.
The indices of consumer, manufacturing and service sector confidence have sunk to the 2013 baseline, yet a certain sense of relief prevails among many economic players as the deadlock has prevented an enormous surge in tax and expenditure. Despite maintaining the carried-over budgets, the public deficit, far from shrinking, increased by 18% in the year up to June 2019, due to the marked increase in spending during the previous year.
Certainly, the carrying-over of budgets tempts one to feel that “it could have been worse”. Spain does not have the North American concept of “suspension of government”, so budgets are carried over and public institutions do not cease to function: public salaries and pensions continue to be paid. Nevertheless, there are major financial consequences.
Spain abandoned its drive for reform some years ago now, and in many ways, the government survives by leveraging a monetary policy which, although it has reduced risk premiums for the whole of Europe to an all-time low, disguises the true risk. If we analyse the deficit reduction for the last two years (a time of peak growth), we see that it basically stems from lower debt servicing costs—and not from a reduction in spending.
A further carry-over of budgets has three clear financial consequences. It makes a re-evaluation of pensions and the updating of public salaries more difficult. It has a similar effect on the financing of the Autonomous Communities (which devote over 70% of their budgets to Health and Education), and it halts investment in infrastructure.
It is difficult to assess the overall financial impact, but there are three aspects that can be assessed: the opportunity cost, the impact on employment, and of course the easing effect given the impossibility of imposing anti-growth measures.
If we begin with this last aspect, it is obvious that Spain is still growing at 2%, and is creating fewer employment posts; it is however creating net employment, because the rises in taxation that have been announced have not been implemented and essential legislation has been overturned. In this respect, the political deadlock has a positive effect which we can quantify as up to 150,000 jobs and a 0.2% rise in GDP.
The opportunity cost is obvious. Investment, recruitment decisions, and consumer commitments are at a standstill due to the lack of clarity. The waste of time, the lack of essential reforms to the Social Security system, to legislation in relation to employment, to energy and to the financing of the Autonomous Communities means that Spain is losing its chance to effect the said reforms during a period of growth and in a favourable climate, with low interest rates, expansive monetary policy and affordable oil prices. This opportunity cost will be even greater if the country finds itself (as it did in 2012) in a position where it is obliged to effect reform during an economic downturn.
In terms of the negative impact, BBVA Research assumes the current uncertainly could reduce the annual growth of GDP by between one and three tenths—meaning a cut in the labour market of between 150,000 and 200,000 jobs.
Of course, these figures are forecasts based on a key assumption: that the alternative to the present situation is not only a stable government, but also one that would implement the appropriate reforms. This is not an easy assumption to take for granted, as the fragmentation of the parliamentary landscape seems set to be aggravated by the emergence of new political parties, and there is little possibility of any structural reforms being agreed.
The impact on growth is already evident, but we should also bear in mind that things could have been worse, with flawed measures and budgets. That is why what is needed is a government pact between the major players on the parliamentary landscape to focus on the essential reforms that should lie outside the electoral battlefield and which should be approached in a spirit of solidarity.
“Daniel Lacalle. Economista, director de Inversiones en Tressis Gestión, autor, asesor internacional, profesor de Economía Global en IE e IEB.”