Rajoy capitalized on a recent interview to address criticisms of his decision to cut taxes, affirming that he did not find out about the extent of Spain's deficit until December 27. Was he in the clouds? For as much as the press reported on the issue (including elEconomista, which had a front-page story), president Rajoy should have already prepared for a considerable diversion of public funds for both regional governments and the Social Security program.
The government is trying to defend their decision to raise the IRPF (Spain's personal income tax), arguing that the alternative is to raise the VAT, which would encourage fraud and affect consumption. Nonetheless, the VAT is the most threatening to the Spanish economy because it also taxes imports and for that reason does not affect our competitiveness.
Will the IRPF not affect consumption? In regards to greater financial burdens on capital yields, it is troubling for a banking system that has guaranteed liquidity through its deposits, and those will be decried in favor of investments in funds that can be kept until 2014. Anger toward these measures comes mostly from big supporters of the Partido Popular (PP). And there are good and bad lessons to take away.
The bad is that Rajoy has ceded to Arenas, who wants to go against high salaries in order to facilitate his campaign. It is no accident that Rajoy has confirmed that the next cuts will not take place until after the March elections in Andalusia. And this kind of partisanship is irresponsible. The good is that Rajoy can employ the first big cuts as the ideal pretext for starting a string of cuts across all sectors. And this could be extremely beneficial for the Spanish economy.