Last month’s election in the United Kingdom attracted considerable attention, not only because it would decide Brexit, but also because of the potential risk of a hard-left Labour government in the world’s 5th-largest economy.
The British dodged that bullet but the people of Spain are not so fortunate. A new government with a very statist platform has just been formed.
Writing for CapX, Luis Pablo de la Horra explains that Spain now faces a grim future.
The agreement between socialists and populists includes an economic agenda which, if carried out, would have a disastrous impact on the Spanish economy. …the new coalition government intends to repeal the labor-market reform passed by Rajoy’s conservative government in 2012. This reform, which was aimed at introducing flexibility in Spain’s dysfunctional labor market,
has crucially contributed to reducing the unemployment rate from 26% in late 2012 to 14% today. In fact, a 2016 report by BBVA Research shows that the labor-market reform prevented the destruction of almost one million jobs between 2012 and 2015. ..Sánchez’s government plans to increase taxes on large corporations… The agreement between Sánchez and Podemos also includes the imposition of rent controls in large cities. …Given that the problem of housing in Spain is related to an insufficient supply of apartments in urban areas, rent controls would only aggravate the situation, reducing the number of dwellings available and pushing up prices in non-rent-controlled areas. …An increase in public spending is also among the plans of the soon-to-be new government of Spain. …Juan Ramón Rallo, professor of Economics at IE Business School, estimates that the increase in public spending planned by Sánchez’s government for this year amounts, in net terms, to 3 percentage points of GDP.
A column by Leonid Bershidsky for Bloomberg also notes the new government’s hard-left agenda.
The formation of the government headed by Socialist leader Pedro Sanchez and including the far-left Podemos group…commits him to a more resolutely leftist agenda than the Socialists would have advanced alone. Among other things, it calls for the repeal
of the 2012 labor market reform, which succeeded in driving down unemployment from its peak of 26.3% in February, 2013 to about 14% today. …The coalition also plans to hike income taxes for corporations and high earners, starting with those individuals who make 130,000 euros ($146,000) a year and capital gain taxes. A minimum wage hike to 1,200 euros a month from the current 1,050 euros is planned. The leftist parties also have committed to unlink pensions from life expectancy…an ambitious tax-and-spend program.
By the way, I can’t resist sharing these excerpts from a BBC report on the hypocrisy-drenched leader of hard-left Podemos.
Pablo Iglesias and Irene Montero, the party’s spokeswoman, were accused of hypocrisy for spending €600,000 (£527,000; $700,000) on a house with a swimming pool and guest quarters.
Mr Iglesias has previously criticised politicians who live “in villas”. …Some rank-and-file members said it undermined the party’s grassroots credibility. …Mr Iglesias formed Podemos in January 2014 with a group of fellow left-wing university lecturers. …He has previously made much of the fact that he lived in modest accommodation in the working class Madrid neighbourhood of Vallecas and that he bought his clothes in supermarkets.
The moral of the story is that people never get rich from leftist economic policy, but leftist politicians inevitably wind up fat and happy.
But I’m digressing.
What makes the new Socialist-Podemos government so disturbing is that Spain desperately needs to move in exactly the other direction.
Writing for Cayman Financial Review, Miguel Sanchez de Pedro warned about his country’s unpalatable fiscal position.
Spain is a welfare state… Public expenditures represent 43.9 percent ($498 billion, 2017) of GDP. …pensions, healthcare and education made up 68.2 percent ($418 billion) of total public expenses for the year 2017. …The quasi-federal regime has proven highly expensive and inefficient,
particularly during troubled economic cycles that leave the central government largely without any capacity to influence expenditure and rebalance regional finances. …The untenable compulsory public pension system is threatened under current and foreseeable scenarios of an ageing population…the social security accounts show a technical bankrupt institution with a negative financial net worth…due to the growing mismatch between the number of contributing workers needed to pay per pensioner – actually 1.9 workers per pensioner.
And here’s a portion of an infographic he put together about his nation’s unstable pension system.
A big problem for Spain is that too many people are riding in the wagon and too few workers are generating prosperity in the economy’s productive sector.
In a column for E21, Daniel Di Martino highlighted this concern.
Sánchez’s plan is to increase spending and finance it by raising taxes on businesses and high-income individuals. …These measures would discourage work and solidify the culture of dependency on the state.
…hiring more public workers would make more people want to switch to the public sector… there are more people who receive government pensions, are unemployed, or work for the government than there are workers in the private sector. …Prime Minister Sánchez’s measures would sentence Spaniards to joblessness and state dependency, while emptying the state coffers when millionaires and soccer players leave.
And here’s a pie chart from his column.
In a study for the Bank of Spain, five economists crunched numbers for the country’s economy and concluded that higher taxes don’t yield good results.
In this paper we adopt the narrative approach to estimate the output effects of tax shocks in Spain. To this end, we have constructed a detailed record of all the relevant legislated tax changes implemented during the period 1986-2015.
…Next, we estimate the GDP effects of an exogenous tax change by constructing impulse-response functions derived from simple VARs. …We find that a 1% of GDP increase in taxes depresses output by around 1.3% after one year, this effect fading away at more distant horizons. …All things considered, our set of estimates provides a coherent picture of negative short-term output effects triggered by tax increases (and vice versa).
Here’s one of the graphs from the study.
This echoes earlier academic research showing that class-warfare tax increases are especially destructive.
And let’s not forget how higher corporate tax burdens in Spain also have backfired.
P.S. Supposedly right-of-center governments in Spain also have adopted bad policy, so maybe voters figured they should opt for the real thing.
P.P.S. Spain has a peculiar problem involving its navy.
P.P.P.S. Politicians always claim they want to tax the rich, but the Spanish experience shows that people with modest incomes are the big victims, to it’s understandable that they do everything possible to protect their money from greedy government.
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Image credit: Efraimstochter | Pixabay License.
