From collapse to austerity in Spain

THE BATTERY of measures announced July 11, by Rajoy amidst unworthy applause from his party, constitutes an attack against the social majority and represents declaration of war against the working class. The degree of contempt for the most vulnerable stands out with the cuts to unemployment benefits. It is therefore not surprising that there were immediate fightbacks by labor unions and social organizations.

The president of the government does not deny that the adopted measures are brutal antisocial attacks, as the entire budgetary adjustment came to pass on the date the spending cuts were announced. The central question of increasing business taxes--in free fall for years--never came up. Nevertheless, Rajoy presented these measures in parliament following the tax mandate from the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF), as necessary and unavoidable, as the "only" possible solution.

He attributed the cuts, as with the anti-labor reforms, to economic efficiency that would secure the economic recovery. This hustler intends, once more, to beat us with his sleight of hand and his pretense of common sense, while what he is actually doing has immediate detrimental effects for the future of the economy. Here lies his Achilles' heel.

Meanwhile the PSOE (Spanish Socialist Workers Party) headed by Afredo Pérez Rubalcaba, does not have the ability to influence political debate, trapped by its immediate past--the cutbacks it imposed in May 2010--as well as its social-liberal conception of the economy, and the European Union (EU), preventing it from posing a real alternative. The role of the party is one that creates state policy, but these are moments wherein one must carry out the policy of the majority against barbarism.

IN 1966, philosopher, linguist and sociologist Maurice Godelier questioned capitalist rationality and reason, starting with his work, Rationality and Irrationality in Economics. It seems that Brussels, Berlin and Madrid were again debating between the two sides of the dichotomy as it corresponds to the contradictory nature of capitalism.

On the one hand, the main European governments and institutions of the EU act as representatives of the interests of finance capital, guaranteeing that the debts incurred are recovered by the creditors. This led to the Memorandum that imposes the bailout on the Spanish state, enforced by the EU, in order to recapitalize the Spanish banks. The agreement also requires repayments to foreign creditors, the liberalization of natural resources, social spending cuts, wage adjustments, tax increases, etc.

The measures approved by Budget Minister Cristobal Montoro, Economy Minister Luis de Guindos and Rajoy, including the new adjustments, are a good demonstration of the irrationality and incompetence of these servants of the markets.

They were made under a supposed economic reorganization, necessary for an exit to the crisis, but yet merely reinforce the current conditions of economic depression. This trio doesn't seem to understand what to do with nor the consequences of their decisions, though they have placed the Spanish economy in the middle of a quicksand quagmire.

Montoro's pimp-like imposition of the austerity program on the autonomous communities--with an objective of more severe deficit than that which was "approved" two months ago--will produce new cuts in basic public services, such as health, education and welfare.

This is also is a huge economic blow to various sectors that will see increased recession and unemployment. The elimination of the Christmas bonus for thousands of public employees is the latest attack on collective wages, and will also have effects on spending and demand with similar consequences for the most vulnerable.

Privatizations of the remaining crown jewels such as the Spanish National Railway Network (RENFE), will only bring payroll staff reductions, will worsen public services, and increase profits in the private sector. In all these cases, the "savings" are going to be smaller than the economic losses that will be created for the majority of society in Spain.

Amidst this paralysis, they took further advantage, announcing the reduction of social security payments--a new gift for the bosses at the cost of our salaries and coverage--much like the tax on energy consumption.

This new tax, far from resolving the deficit fraud, translates as an increase in prices for small consumers without achieving a reduction in the global energy needs. Nor will the tax lead to a shift toward renewable energy sources, putting everyone's future at risk.

What is new in this situation aren't these announcements nor the essential popular mobilizations. What is new is that, for the first time since the constitution of the People's Party government, its orientation has provoked severe criticism from diverse business sectors for the harmful effects caused by the decrease of public employee's wages, even before the increase in the value added tax (VAT) as of September 1.

A good part of business owners and their analysts fear that the tax increases will again suppress demand. In the tourism sector, Exceltur estimates that each point in increased VAT will directly affect the prices and provoke a reduction of revenue by 1 billion euros a year, which will mean a loss of thousands of jobs.

Juan Rosell, the boss of bosses of the Spanish Confederation of Business Organizations (CEOE), continues to demonstrate his understanding and support for the measures of the People's Party. However, the monolithic unity they've maintained regarding labor reform is coming apart.

Above all, we must agree with Ernest Mandel, as he stated in 1983 in one of his university conferences in today's tortured and combative Athens: "Bourgeois society as a whole is characterized by a combination of its own unique kind of partial rationality and global irrationality." The VAT tax increase is a model.

FINALLY, THE People's Party decided to increase fiscal income with a heavy tax increase. But just as the IRPF (the personal income tax) did recently, the new tax increase will fall primarily on the working classes. The main source of new tax revenue stems from the increase of the VAT. The remainder of imposed measures will have a smaller immediate effect.

It's a well-known fact that the VAT is an indirect tax that consumers pay, and it has a huge regressive impact. There are few regulations to correct the perverse affects that it provokes. It's an "easy" tax that weighs on the population with scarce resources to oppose it, not on those with sources of wealth--who are wealthy also in instruments of pressure.

The increase in the standard VAT rate from 18 to 21 percent and of the lower rate from 8 to 10 percent implies that 60 percent of the goods and services covered by gross domestic product (GDP) seems to be affected. Moreover, diverse goods and services are no longer taxed at the lower rate, but will pay the higher, general rate.

This means that not only is the tax increasing on luxury items or expendable goods, but also on necessities such as clothing, transportation, housing, electricity and water. It will affect goods and services like telecommunications, eyeglasses and contact lenses, diapers, hair salons and processed food, as well as bars and hotels.

The lowest rate will remain at 4 percent. It will be levied on fresh food, such as milk, eggs, fruits, vegetables, legumes, books and newspapers, school supplies, medicine and public housing. This means that the price of processed food will climb, since the producers will attempt to use higher prices to recuperate the 400 million euros that they must pay for the increased tax on their consumption and the acquisition of machinery.

No goods will be exempt from higher prices. Prices will rise overall, contributing to the erosion of purchasing power and a major deterioration to aggregate demand. The Organization of Consumers and Users quantifies the average increase to an annual expenditures of 415 euros per family. Others estimate about 800 euros. We must include the fact that purchases made in June 2010, when the standard rate changed from 16 to 18 percent and the lower rate from 7 to 8 percent.

The VAT was so regressive in social terms, that the standard rate was effectively increased 23.8 percent and the lower rate 30 percent in two years. As it is now, each family will spend at least 800 euros more than in 2010, which means that for a large part of the population, almost an entire monthly salary will go to the increase in the VAT.

In 2010, tax revenues increased by 5 billion euros annually. Now, the government estimates that it increased at 7.5 billion euros in the 12 months before the forced imposition of the tax. That was a big mistake. The stagnant economic situation today is far worse than in the past two years. It is therefore more than likely that tax deposits will not increase, because an increase of this type will be offset by the decrease in activity.

The government media argues that Germany established a rise of three points in its VAT in 2007, from 16 to19 percent, omitting that it was done at a time when Germany's economy was growing by around 3 percent a year. In the case of Spain, the prediction from the government in 2012 is that the GDP will fall by 1.7 percent, while internal demand shrinks by some 4.4 percent.

In our country, due to the housing bubble, the permissiveness toward tax fraud and the continuing decline of taxes on income from capital since 1996, the tax burden on GDP stood at levels well below the EU area, particularly the euro area. This has been one of the main causes of the rapid increase of the public deficit, when in 2007 there was a surplus. That's one of the factors caused an increase in the public debt.

The paradox is that Spain is both one of the EU countries with lowest tax burdens, and yet has one of the higher VAT--that is a regressive tax increase. Since the beginning of the current crisis of the 27 EU member states, 17 have raised VAT. Only Hungary and Romania approved a bigger increase than was announced by Spain's government, but returned to a lower rate. In the eurozone, only Greece, Ireland, Portugal and Finland maintain a VAT rate--23 percent--higher than the Spanish.

ARE THERE no other solutions than those proposed by the Spanish trio and the troika? There are, and all kinds. There are many roads to another horizon.

If we are talking about debts: Should the citizens pay for the debts of banks and businesses? Is the debt legitimate? Should the legitimate debt be paid all at once?

If we're talking about finances: Why not convert the private financial business into one big public bank that invests in productive activity and maximizes social welfare? Why not combat the depression of demand with generalized salary and pension increases?

If we're discussing the halt in production: Why not distribute the work and employment while cutting the working day? Why not drive massive investments into alternative energies, health care, education or research?

If we're talking about the deficit: Why not combat and eradicate tax fraud, estimated at 6 percent of the GDP, which translates to 70 billion euros, equivalent to what the government wants to save and collect on the backs of the weakest populations?

Why accept transactions with tax havens? Why not increase the taxes on business profits and end tax shelters in Spain, a country where corporate taxes have an effective tax rate at about 10 percent, below even the nominal rate of Ireland's 12.5 percent tax rate before the bailout? Why not restore the capital gains tax and create as well, a tax on the wealthiest?

These and other questions point to other reasonable measures that would make it possible for the popular and working classes to avoid paying for the crisis. To put these in motion, social and political energies must be gathered to end the anti-social orientation on offer from those who govern in the EU and Madrid.

First published at Viento Sur. Translation by Karen Domínguez Burke.