Rocketing unemployment is going to make it even harder for Spain to meet promises to slash its budget deficit, and it is already hard to find an analyst who believes the growth assumptions behind the forecasts.
The number registered as unemployed topped 4 million in January, official data showed Tuesday, an ominous development for a government that last week promised to save €50-billion but neglected to say exactly how.
The government's forecasts were also based on the assumption that growth would be around 3 per cent again by 2012, a scenario dismissed by analysts as wishful thinking for an uncompetitive economy still suffering from a deflating property bubble.
The austerity announcement came as Socialist Prime Minister Jose Luis Rodriguez Zapatero returned from the World Economic Forum in Davos, where he was forced to try to reassure investors that Spain was not headed for similar trouble to Greece.
Cutting spending is going to be particularly hard given that the country that created jobs at the highest rate in Europe for a decade from the mid-1990s is now destroying them more quickly than anywhere else on the continent.
For now Spain has largely escaped a government bond selloff thanks to a public-debt-to-GDP ratio that is still a relatively low 60 per cent, only about half that of Greece.
“There's no question the government is committed to fiscal tightening ... but growth forecasts are very optimistic,” said economist at Deutsche Bank, Gilles Moec. “They expect GDP to be back at levels before the crisis by 2012.”
It is hard to find an analyst who believes Spain can meet its target of reducing its budget deficit to 3 per cent of gross domestic product by 2013. But many think the Socialist government, which does not face elections until 2012, still has time to make big enough cuts to soothe bond market nerves.
“It would be enough if they could make a big change of direction, not to cut to 3 per cent, as I don't believe they can do that, but a big change in direction would calm the markets,” said Xavier Mena, professor of economics at the Esade business school.
To the surprise of many last Friday, the government distributed a table of budget deficit forecasts including last year's 11.4 per cent of GDP and 3 per cent for 2013 but blank spaces where the figures for the intervening years should have been. The government said that this was because it still had not worked out how to make regional governments cut their spending.
Details of specific cuts even to central government programs were also lacking, apart from a pledge to reduce the public service wage bill. Analysts said the market will want to hear the nitty gritty.
“There are still lots of figures missing and Spain is probably going to have a period of social tension,” said Jose Luis Martinez, of Citigroup, who nonetheless thought the government had a fighting chance of making the cuts.
“It's possible, but it will depend on a lot of factors. One of them is better coordination with regional and city governments and secondly a cut of the size we're talking about will require cuts to social spending and that's going to face strong opposition from the unions,” Mr. Martinez said.
So far, Mr. Zapatero has kept the unions on side by promising them he would not give in to business demands to make it cheaper to hire and fire workers. But labour leaders will be in an ever less accommodative mood as unemployment nears 20 per cent.
Unions, and the public, have also been angered by the government's surprise announcement last week that it wanted to raise the retirement age to 67 from 65.
A group on social networking site Facebook entitled “Like Hell I'm going to work until I'm 67!” had gained more than a quarter of a million members by Tuesday.
“It's going to be difficult for them to avoid social conflict, really difficult,” said Mr. Mena, who thinks that Zapatero will also have to replace officials including Economy Minister Elena Salgado.
“If Salgado stays, their new policies aren't going to be credible,” he said.
