By: Sebastian Mariz, CEO of Influence Spain
In the midst of the last negotiations for this legislature, on the 2023 national budget for the public administration, the Prime Minister (PM) is showing signs of losing his political pull and of no longer instilling high confidence amongst voters or his party members. In addition to losing voter popularity in the weekly polls, the fiscal mutiny instigated by his own party members at the end of September, and the strong turbulence felt In the regional government of Catalonia, are the clearest signs that the PM is not experiencing his finest moments.
In an unprecedented turn of events over a very short period of time, the PM and his Minister of Fiscal Affairs have had to recapitulate on their refusal to lower taxes in the new budget for next year. They have also had to contradict earlier rejecting calls to lower taxes made by the leader of the opposition popular party and by several regional conservative governments. Out of fear of losing the May 2023 regional and municipal elections to his conservative rivals, the regional Premier of Valencia, announced a reduction in income taxes for those earning below 60,000.00 euros per year.
This announcement, made in Valencia where the PM built his campaign to win the general elections in December 2019, caught the PM, and his staff, completely by surprise and forced the Prime Minister to change his message and announce the adoption of new tax rates as of 2023. These new rates include reduced income tax for low income earners, lower corporate tax for small and medium sized companies, higher income tax for those earning more than 60,000.00 euros per year and higher tax on capital gains. Additionally, there will be a temporary wealth tax on high income earners as well as new restrictions on the losses reported by large multinational companies, subsidiaries or affiliates. Simultaneously, the Fiscal Affairs Minister once again warned the regions, and in particular those governed by socialist led coalitions, that any further tax reduction announcements would not be tolerated by the Prime Minister or his cabinet.
Coinciding with this fiscal mutiny against the PM and his Fiscal Affairs Minister, the Premier of the region of Catalonia has been forced to fire his Deputy Premier and question the loyalty of his junior partner, Junts per Cat. The crisis arose, following the tabling of a parliamentary question from the junior partner suggesting the Premier should be subjected to a vote of no-confidence for failing to meet his promises regarding Catalan Independence.
The coalition remains in place and the vote of no-confidence has not been tabled, but the situation will remain unstable while militants of Junts per Cat decide what to do over the next few weeks. They, in turn, will be watching closely to what happens to the PM, negotiations on the national budget and the significant transfer of power and money to the region of Catalonia that is expected in return for Catalan support on the national budget. This depends, in great part, on the outcome of negotiations between the PM and his coalition partner, Unidas Podemos (UP), on the contents, provisions and sums to be included in next year’s national budget.
So far, negotiations have proceeded well amongst the coalition partners although tempers flared over the adoption of a new national housing law, which protects tenants from home evictions and from paying higher rents, the higher spending on military defense and the adoption of a higher income tax on those earning over 200,000.00 euros per year.
Grudgingly accepting that the PM has no choice but to increase military spending as instructed by NATO, UP achieved concessions on things like a hefty 8.4% hike in public pensions, and record spending, 267 billion euros, on social welfare programmes, in the draft budget adopted on the 4th of October.
As regards the housing law, negotiations remain blocked and are unlikely to progress any time soon, after the government agreed to make it easier for the courts to evict tenants who fail to pay rent or have Illegally occupied someone’s house. The majority socialist party group in the Parliament introduced these changes, through amendments tabled to unrelated law being debated and adopted in parliament. This has significantly upset parliamentary members of UP. Adoption of new rules on evictions comes amidst data which shows that rental prices continue to soar across Spain, while demand for owning a house is expected to fall thanks to rising interest rates on mortgages.
It could also be said that regardless of the decision taken by the Premier of the region of Valencia, the PM was left with little choice but to lower taxes for the more vulnerable and raise them for the more fortunate, given the current economic context, which continues to worsen month by month. However, inflationary pressures have slightly decreased in September to 9% from the 10% registered over the summer, thanks in the most part to lower energy prices for electricity, gas and petrol.
The PM’s position during budgetary negotiations were also influenced by the demands being made by the civil servant labor union, which is demanding a retroactive 10% salary hike for 2022, and further hikes in 2023 and 2024, to compensate civil servants for the loss in purchasing power due to high inflation. Several thousand public employees took to the streets mid-September and threatened further protests and strikes if the government failed to listen to their demands. Reluctant at first, the PM instructed his Fiscal Affairs and Employment ministers to initiate negotiations, firstly offering an 8% to 9.5% hike in salaries over three years and a reduction of the working week to 35 hours. Strikes have been called off, but union representatives have made it clear, that they expect a better deal.
A hike in public salaries, lower taxes for lower income earners, and an extension of public subsidies to alleviate high electricity, petrol prices and higher interest rates, will have a marked impact on public finances and the government’s public deficit and public debt objectives. Public debt and deficit figures have begun to rise again, following a small dip registered in the spring. Public debt currently sits at 1.486 trillion euros, or more than 118% of GDP and the deficit is hovering around the 5% range.
Debt and deficit figures are expected to remain more or less the same next year, although the Government has based its draft budget on projections for next year in which GDP grows by 2.1%, a public debt ratio of 112.4% and a public deficit of 3.9% and registering a 12.2% unemployment rate. However, concerns regarding Spain’s ability to pay for its huge debt, amongst the Spanish and European central banks, remain low. Given that the Spanish Government has, over the last few years, reduced its short term financing for longer term 8 year bonds, which has relieved Spain’s debt financing burden, and is expected to rise from 2.2% of GDP this year, to 2.4% next year.
Household credit crunch
The Bank of Spain as alerted banks, the Government and consumers of the deteriorating credit situation amongst over 350,000 vulnerable households in Spain. Those who spend more than 40% of their income on mortgage installments could end up not being able to afford their homes if mortgage rates continue to go up. The total number of households In a critical situation has more than doubled over the summer months, by around 175,000. Although in a far less critical situation, the Bank of Spain has also alerted small and medium sized companies, who have taken out short term loans over the past year or two, of the risks of a smaller credit crunch. Under a recessionary scenario, as predicted for next year, with shrinking turnovers, margins, and higher Interest rates, banks could find themselves in 2023 with a growing number of companies defaulting on their loans.