- This is the third paper in a series on the Spanish economy. The first paper is The Spanish recession and the second is The Spanish banks.
- Spain is in recession. Unemployment has surged and as a result the economy’s automatic stabilisers have negatively affected the public deficit, with tax receipts down and benefit payments up.
- In addition Spain has launched a hefty discretionary fiscal easing of 3.0% of GDP in 2008 and 2.0% in 2009. We expect the fiscal easing together with the automatic stabilisers to push the public deficit to -9.5% of GDP in 2009. Given the high forecast unemployment rate next year, we expect the fiscal deficit to amount to -9.0% of GDP in 2010, despite a likely reversal of the fiscal easing.
Government
Fiscal stimulus in response to the crisis
As the global recession picked up shortly after the Spanish housing market started correcting (see The Spanish Recession), the Spanish government acted immediately. In 2008 government expenditure rose by 5% of GDP on the back of a massive stimulus. This was partly due to automatic stabilisers kicking in but also due to the government implementing further fiscal stimulus.
The discretionary fiscal stimulus amounted to 3% of GDP being allocated in 2008 and 2% in 2009. The stimulus consisted of measures to offset falling domestic demand through tax breaks for firms, subsidies for employment and further assistance for the unemployed. The government has also secured the banks by raising deposit insurance, improving liquidity and guaranteeing debt issuance. Though all the above-mentioned measures are well timed and have helped Spain to weather the storm, the government has failed to implement overdue reforms to secure the country’s long term potential, such as much needed labour market reform.
