Spain stuck in tax trap

The economic recession in Spain has deepened more than expected in Q2 2012. GDP contracted 0.4 points since Q1 and 1.3 points year-to-year. The main cause is a plunge in consumption with no signs of recuperation and lesser expectations due to the latest VAT increase.

GDP in 2012 could turn out worse than the government predicted (-1.5%) and foil its attempt to meet the deficit goal, because falling commercial activity undermines revenues and will require even more spending cuts. Luis de Guindos, and nobody else, has started to talk of such cuts. Up until now, the cutbacks that Rajoy's team has approved total to 170 billion euros between 2012 and 2014. 70 billion of this amount corresponds to tax increases and 103 billion to spending cuts.

The national government will take on most of the cutbacks. Regional governments will cut 22% and local governments 7%. Spain is in a tax trap: it is unlikely that it can reduce its deficit (inevitable cutbacks will reduce consumption) and Spain needs to create growth so that revenues do not fall. To get out of the quagmire, more structural reforms and a bailout from the rest of Europe are needed. Van Rompuy reiterated yesterday in Madrid that the EU is prepared to give Spain a bailout loan. Rajoy has complied with the plan that was written up last month, but has not t said what he will do next. Of course, a bailout will not come free and the work left to do will demand many sacrifices, but Rajoy should not let Spain keep bleeding a slow death. Nor should he wait for elections to explain the size of the problem and what work needs to be done to fix it.