Spain could have avoided it’s public deficit problem

A great deal of Spain’s current problems with public deficits were originated between 2007 and 2009. As the real estate bubble burst, the public sector went from a surplus of 1,91% of GDP to a deficit of 11,19% of GDP. Such budget breakdown equals to 13,1% of GDP.

The following chart shows this situation more clearly:

In 2009, Spain’s GDP amounted to slightly more than one trillion euros, which means that each percentage point equals to an increase in the budget deficit of around 10 billion. By then, public spending was higher than 46% of GDP, which means that the public sector was managing over 480 billion euros. If we compare the deficit with public expenditures instead of doing it with GDP, we find a gap of almost 30%.

Revenue data also shows how the end of the real estate bubble contributed to this scenario. Between 2007 and 2008, tax receipts fell from 41,1% to 36,7% of GDP. This drop of 4.4% is unmatched in any other developed countries, as seen in the following chart.

Falling state revenues amounted to 6,38% of GDP in just two years. However, during the same period, public spending rose by 6,7% of GDP. This means that half of the deficit can be blamed due to lower revenues while the other half is explained by additional public spending.

Nine of the thirteen points of the budget breakdown can be explained due to automatic adjustments in the spending associated with welfare programs. For instance, when unemployment goes up, so do unemployment benefits. However, 4,1 percentage points in this budget breakdown of 13,1% can be tracked back to higher spending that was non-related to already established government programs.

What does this mean? That final deficit number for 2009 could have been of 7,1%, which is almost 40% less than the 11,19% that was actually registered. In that scenario, an eight per cent cut in government spending would have been enough to lower public deficit figures below the 3% mark, which would be in compliance with Eurozone targets.

Diego Sánchez de la Cruz is an analyst at Libertad Digital. His work on international economics has been published in different media outlets.

Written by Diego Sánchez de la Cruz, alumnus of the Master in International Relations (MIR)