Europe | Sánchez’s sums

A budget in Spain points to an election

Taxing and spending are to rise—but only a little

Does it add up to a majority?
|MADRID

“WE’VE SPENT years being told that the crisis was over. The time has come for Spaniards to feel it.” With that, María Jesús Montero, the finance minister in the new Socialist government of Pedro Sánchez, unveiled a draft budget for 2019 that modestly increases social spending while raising some taxes too. It comes along with a proposed 22% increase in the minimum wage. For the government, these measures mark an overdue assault on rising income inequality and a rebuilding of the welfare state after years of austerity. For the opposition, they will kill off an economic recovery now in its fifth year. Both are exaggerating. In doing so they are setting some clear battle lines ahead of an election that must come by mid-2020 at the latest.

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Mr Sánchez heads a minority government which unexpectedly came to power in June after a censure motion toppled Mariano Rajoy, his conservative predecessor. Mr Rajoy had picked up the pieces after an economic slump in 2008-12. He gradually trimmed the fiscal deficit from 11% of GDP in 2009 to 3.1% last year, mainly by cutting spending.

Mr Sánchez’s budget is the result of an agreement between his Socialists and Podemos, who are further left. It proposes additional spending of €5.1bn ($5.9bn, or around 0.5% of GDP), mainly on pensions, student grants, housing and social care. But it also projects new revenues of €5.7bn, from small increases in personal and corporate income taxes, and new imposts on share transactions and digital platforms. Officials stress that the budget will cut the deficit from 2.7% of GDP this year to 1.8%, a target agreed with the European Commission. And Spain’s tax burden will remain below the European average.

The projected increase in revenue looks ambitious. Raymond Torres of Funcas, a think-tank, says he thinks the deficit will end up at about 2.2% of GDP. That would be in line with Mr Rajoy’s performance. But the risks are increasing. Growth, while still healthy, is decelerating. The cost of servicing a public debt that stands at 97% of GDP is set to rise.

With the unemployment rate still at 15%, many economists worry that the steep rise in the minimum wage will discourage hiring, especially of younger workers. Under Mr Rajoy, unions and bosses had agreed to a more gradual increase. However, the minimum wage kicks in for fewer than one in 20 workers, despite Spain’s comparatively low wages. Mr Torres thinks average wages will rise next year by 2.1%. That is more than the growth in productivity but only slightly above inflation. The rise may help to boost flagging consumption.

Pablo Casado, who has replaced Mr Rajoy as leader of the conservative People’s Party (PP), called the budget “irresponsible, impossible and suicidal”. In fact, the most irresponsible item is an increase in pensions, which the PP supports. But his comment suggests that both sides see a political opportunity to be exploited.

To get the budget approved in Congress, Mr Sánchez needs not just Podemos and the Basque nationalists but also the Catalan separatists. They say they will vote for it only if the government intercedes to free their leaders, imprisoned over an unconstitutional independence bid. Mr Sánchez cannot and will not do that. In the end the Catalans will probably fall into line.

But the PP could still block the budget in the Senate, where it has a majority. If it does so, Mr Sánchez might choose to call an election. He would offer Spaniards a clear choice between a slightly bigger state and less inequality, or slightly lower taxes and perhaps faster growth. That’s democracy.

This article appeared in the Europe section of the print edition under the headline "Sánchez’s sums"

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