Spain to Take Bigger Steps to Expand the Its Economy By Contracting Its Economy

And One Piece of Logic Does Creep Into the Policy

The many countries of Europe that are having problems with government deficits and rising government debt have implemented policy to reduce growth in the hopes that somehow that will cause the financial markets and capital markets to regard these countries as safe investment areas, and that it will cause a balanced budget.  Ok, who can name countries where this policy instead has created lower growth and higher deficits and higher unemployment?  Portugal, Ireland, Britain and Spain come to mind.  Who can name countries where the policy has worked? 

Can we get back to you that?

Now Spain and Italy are joining the “Hope Over Reality” club by implementing austerity programs and expecting the economies to grow and deficits to be reduced.  Spain just recently found out that its government deficit is going to be higher than originally thought

Spain's new government Friday said the country will miss its budget-deficit target by a wide margin, and announced spending cuts and tax increases valued at about €15 billion ($19.4 billion) to stem the tide of red ink.

One week after conservative Prime Minister Mariano Rajoy took his oath of office, his government said Spain's budget deficit will be about 8% of gross domestic product 2011, well above the 6% target the previous government of Socialist Prime Minister José Luis Rodríguez Zapatero had committed to with the European Union and financial markets.

 (wow, who could have seen that coming) and so the country is implementing this policy.

Madrid proposed about €8.9 billion in spending cuts for 2012 that ranged from trimming public-sector employment to curbing subsidies for political parties. It also went back on a campaign pledge of Mr. Rajoy's and approved tax increases valued at about €6 billion. The total budget adjustment represents about 1.5% of GDP.

Ok, let’s do the math.  The deficit is 8% of GDP, and the reduction in spending/incrase in taxes will be 1.5% of GDP.  So a 1.5% reduction in spending as a percent of GDP is supposed to eliminate an 8% deficit.  This must be some of that new math they are talking about.  Oh, maybe not.

Still, Spain's latest measures will likely be insufficient to slash the budget deficit from 8% of GDP in 2011 to the target 4.4% in 2012, a gap of about €36 billion. The government will present a new 2012 budget in March. Ms. Saénz de Santamaría hinted there is more austerity to come.

The clear implication is that Spain is about $26 billion (in dollars, not Euro’s) off.

Of course, economies are dynamic, so maybe growth will take place in GDP, reducing the deficit as a percent of GDP.  Well why exactly should that happen?  The combined package is not large, comparable to about a combination of spending decreases/tax increases of $225 billion for the U. S., but does anyone think that if the U. S. cut spending and raised taxes by that amount the economy would grow faster?  Really, anyone?

The one good piece of news in all of this is that Spain’s new government has been hit over the head by reality.

"We were not in favor of tax hikes," said government spokeswoman Soraya Saénz de Santamaría at a news conference. "They were forced by the size of the [budget] gap we encountered."

And since raising taxes is far less detrimental to an economy than cutting government spending, the collision with reality is forcing Spain to at least move somewhat in the right direction.  But European government have also pledged to reform their economies in addition to fiscal austerity.  So far in Spain, and Italy and Greece and Portugal and wherever, no reforms in site.

And yes, this story about the need to raise taxes was in the Wall Street Journal, just don’t tell the editors.