Arithmetic of Fiscal Adjustment



Jesús Fernández Villaverde: “Why do markets not trust Spain? Because we have quite a serious liquidity problem. The essential data is this: in 2007 our country had a surplus of nearly 2%, but in 2009 we have closed the year with, more or less, a deficit of 11.2%. This means that in two years time we have had a net change of 13GDP points”

“Remuneration of public employees has been raised more than 1.5 GDP points as a consequence, in the first place, of the unsustainable increase of public employment (it has increased from 2.5 million employees in 2007, to 2.659.000 in 2009, while private economy destroyed 10% of employment). From there, Autonomous Communities and Local Entities have increased their staffs by 146.000 employees”

“Out of the 13 GDP points of budget change, from surplus to deficit, experienced by our public administrations: 3 points are due to the fall of VAT and other special taxes; 3 points to direct taxes (companies and others); 3 points to unemployment benefits and similar; 1.6 to civil servants’ remunerations; 1 point to other transfers; 0.5 to intermediate consumption; a fifth of a point to public investment; and one third of a point to the payment of debt interests”

“What would have happened in Spain with a different fiscal policy? If we had practised a fiscal policy focused on limiting expenditure, we would have presented an approximate deficit of 7% of GDP in 2009, with a reasonable uncertainty ranging between 7% and 8%, which would have freed us from being the focus of all markets.”

“The fact that we have more than reasonable doubts on the economic situation of Spain in ten years time is a reason to start taking action, not to do nothing at all. There’s evidence that fiscal consolidations are positive, like in Sweden. Furthermore, those that work, normally do so because they focus on reducing expenditure instead of on raising taxes”