21.10.2018 23:23

Spain’s General Budget has been a widely commented issue recently on the news, with more critics than praises, but what has astonished me is that there haven’t been many opinion articles arguing critically (either for or against) about the Spanish State Budget. I feel it is essential to provide an image of how this budget could fetter, slow down, and finally shrink Spanish markets in the midterm, just when we were stabilizing our growth track. This populist budget is just product of intense negotiations between Spain’s far-left party leader, Pablo Iglesias, and the Spanish President Pedro Sánchez, which have resulted on further and much more intense interventions in the market, mainly through a generalized tax rise which affects near to 80% of households and reduces purchasing power levels of the great majority of Spanish citizenship. Greater restrictions for trade, a higher minimum wage or an income tax beyond 50% have been only some of the star measures developed by out populist government. Providing an international image of the harm it could make will help other countries to prevent falling in the same trap once again, or maybe not, as we are able to see that past experiences are not always antidotes against repeating the same errors in the future. The Spanish Socialist Party is the best living example of it.

First of all, we should bear in mind the importance of fiscal policy for the socioeconomic development of a country and overall, for a country as Spain member of the EU, being unable to control its monetary policy to correct growth patterns (thanks God, as Brussels has shown to be much more responsible than any of our national governments). Enterprises will be the ones that will suffer the most with the new tax reform proposed by the Spanish left-wing coalition government, as they want to introduce a minimum Corporate Tax rate of 15%, which at first may sound reasonable when looking at mean Corporate Tax rates in the EU, but which definitely doesn’t comply with our economic realities and necessities right now. This rate will affect many firms which are actually paying taxes in external regimes; mainly because their nuclei of commercial activities are developed in other nations. This tax will only be applicable to firms which aren’t integrated into greater groups and which register revenues; not profits, equal or greater to 20 million euros a year. Who does this tax mostly affect then? Well, think about it, companies that receive incomes (without discounting costs, interests or taxes out of it…) of 20 million a year at an international level, are really not so big, as most of them have less than 40 registered employees, as data from INE tell us. Big companies won’t care about this new Corporate Tax, as they are already paying a 20.7% mean Corporate Tax in Spain, as stated by the Economics PhD Juan Ramón Rallo. International companies as Google, Amazon or Facebook are also paying closely to a 19% overall tax, being reported in the same study, which nowadays will also have to confront an extra 3% rate, which will be applied to every digital services firm with a minimum of 750 million global revenue. A perfect scenario to scare off international capital.  Definitely, the new minimum Corporate Tax rate will just increase costs for SMEs (small and medium-sized enterprises) and reduce their competiveness in the market, displacing them out of surging business opportunities and directing control over the market share towards just a few hands. They are harming the ones they are supposedly intending to protect. Nothing new for socialism…

Banks and petrol companies are seen as the devil by this government, and Pablo Iglesias has even stated that the Spanish Government should try to create a new publicly-funded bank by merging Bankia (semi-public financial entity, in process of full privatization) and ICO (the Spanish government public credit agency), and for those privately owned, the government intends to charge an extra 8% rate on Corporate Tax, which consumers will end up paying anyways. This tax has been parked for the moment but it could surge in the future without any previous warning, and probably in a much worse economic situation than the one we are living right now. Mr. Sánchez, just remember that accelerating when going down the hill won’t make you faster, but much more stupid.  

As previously stated, nearly everybody will be negatively affected by all this fiscal party, and even shareholders will see their dividends reduced in volume and value by the fact that the government has displayed new intentions on taxing dividends from companies operating in other countries, while shareholders already pay taxes on those fiscal regimes. This new tax is supposedly trying to prevent future capital outflows from Spain, but it is fully illegitimate, as the EU has clear rules against double imposition, as this reform clearly doesn’t comply with them. Let’s hope the European Commission declines this nightmare budget. On top of it, and also related to financial markets, our beloved populist government will also introduce the Tobin Tax to Spain, which consists basically on charging a rate (in this case 0.2%) on every financial transaction of assets on the stock-exchange, being bonds, either public or private, and derivatives exempt from this fiscal aberration. This tax will just reduce markets’ liquidity and stability by reducing the volume of daily transactions and  turning the price mechanism into a much more inefficient one, as there will be less price corrections of assets, but much wider when they occur. The Tobin Tax has already been implemented in some countries as Sweden in 1984, and causing a massive liquidity crisis on financial markets, consequently forcing the government to change the legislation. The best part of the Spanish case is that maximum estimations agree on that the full potential tax revenue this tax could generate will be 1.000 million, which doesn’t even reach 1/30 of the Social Security deficit. Trying to jump higher by introducing our feet in a bucket.

Even if at first sounds pretty humanitarian and benevolent, the new 900 euros minimum wage rate will completely harm those it’s supposed to help, being another regressive tax. The only effect a higher minimum wage will cause in a country as Spain, which has a historical mean structural unemployment rate of nearly 17%, is to displace workers which offer lower productivity levels and added value below 900 euros a month. So definitely, workers which are not able to cover these extra costs (either by increasing productivity or working extra hours) will be fired. All these issues will benefit big firms which have greater bargaining power and larger economies of scale for cost reduction, while eliminating many traditional small firms from the market by excessive costs in relation to human capital.

In conclusion, we can just resemble how the discursive structure of populist politicians as Pablo Iglesias or Pedro Sánchez works, as we have already seen it in countries like Italy, with a massive increase in public spending and crazy budget proposals, skyrocketing deficits and inadmissibly high bond yields. We already suffered the consequences of an irresponsible socialist government in the years following 2007. History is there to learn from it.