Spain has decided the only way to tackle its budget deficit is via extremely sharp expense cuts coupled with a more modest move to increase taxes. Prime Minister Mariano Rajoy says his government will reduce spending by 65 billion euros over two years. That is an extraordinary number, given the size of the nation’s economy and the need for social services to support the 25% of the working age population that is unemployed.
Rajoy also will ask parliament to increase the nation’s VAT from 18% to 21%. That will put a tremendous strain on consumer, and later business, spending. It will drive the people in Spain who can afford to consume and lift the economy to reconsider what they buy and pay.
Douglas A. McIntyre
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