<B>The government's economic policy</B>

José Luis Álvarez. Professor. Instituto de Empresa

26 September 2005

The gulf between the priorities of the Spanish people and those of its government appears to be widening by the day. While the man on the street worries about unemployment, terrorism and housing prices, the government is caught up with initiatives of limited interest to the general population, such as the Alliance of Civilizations and gay marriages. Meanwhile, the government is paying scant attention to economic policy.

In the March edition of The American Economic Review, Professor Uri Gneezy published an interesting article on the consequences of deceit. It might not be a bad idea for our politicians to take a look at what it has to say.

In one of his studies, Gneezy asked his students the following question: "Mr Johnson is going to sell his car for $1,200. The oil pump doesn't work very well and Mr Johnson estimates that if the buyer realises this, he will have to drop the price by $250 (the cost of the repair). In the end, Mr Johnson decides not to say anything. How would you classify his behaviour: very fair, fair, unfair or very unfair? What if the economic damage were $1,000?"

Although for the vendor, the economic result is the same in both cases, the answers given by those completing the survey went from 70% unfair and 18% very unfair, in the first case, to 32% unfair and 66% very unfair in the second case, as a result of the harm caused to the buyer. The conclusion drawn from this and other similar projects is that for most people, deceit is more unjust if the cost to the other party is higher.

Can this simple example be used to gain a better understanding of the current situation in Spain? Is there a gap between the needs of the Spanish people and the policies of their government? Each month, the CIS barometer asks the following question: In your opinion, what are the three main problems Spain faces today? There are three issues that appear time and time again: unemployment, terrorism and immigration, closely followed by housing and the economy.

It is reasonable to assume that any government would strive towards solving these issues. In four out of five of cases, the economy plays a key role in shaping peoples' attitudes, while terrorism does so indirectly. However, the government has not given the economy priority, but rather has relegated it to a back-seat role, behind the political agenda. In an effort to distinguish itself from its conservative predecessor, today's government has focussed on questions such as the massive regulation of immigrants, homosexual marriages, the so-called Alliance of Civilisations, as well as on the new statutes regulating the relationship between Madrid and Spain’s autonomous regions. These issues seem far removed from what average Spaniards have expressed as their main concerns.

Why does the government seem so intent on ignoring the challenges facing the economy? One possible explanation can be found examining the Socialist Party's (PSOE) electoral platform, which was riddled with contradictions and vague references to its economic program. It basically contained two outstanding ideas: increased productivity and the flat income tax. The argument concerning productivity is easy. Any economist would agree that productivity is one of--if not the most-- important component of a successful economy.

For it is also true that rising standards of living are directly related to economic modernisation. On the other hand, what most economists don't seem to agree on is how--and at what price --a country achieves higher productivity. In other words, we know the ingredients of the recipe (improving education, health, infrastructures, etc.), but we aren't sure how to bake the cake.

How have the PSOE and its economic advisers broached these questions? They have presented no less than three times, a 'plan aimed at making the Spanish economy more dynamic' which includes no fewer than 100 measures. Most entrepreneurs agree the plan is deficient and will do nothing to help Spain tackle the economic challenges ahead.

With regard to the second point--the flat income tax-- we could say that it’s a nice idea, but that it has little substance to support it. It is neither a priority to reduce the number of income tax brackets, nor is the current tax regime so inefficient. What's more, the introduction of a flat tax does not seem based upon the successful experiences of other countries. If we add the various and confusing announcements and denials made regarding income tax deductions, the result is quite disappointing.

And if it weren't bad enough to have the government proclaiming the utopian ideal of an "Alliance of Civilizations", it also is espousing the virtues of achieving budgetary stability throughout the economic cycle—rather than at the end of each year--as if the future performance of the economy could be predicted today. The problem seems to be the government's need to spend more in order to fulfil its political promises and to justify its failure to meet its budgetary goals.

Unfortunately, this recipe puts in jeopardy Spain's economic wellbeing. What's true is that the euro zone's expansive monetary policy requires a far more restrictive fiscal stance on the part of Spain. Otherwise, the country will have a hard time controlling prices, boosting competitiveness and averting asset inflation in markets such as housing.

At this point in the legislative term, the gulf between the priorities of the Spanish people and those of the Socialist government have become glaringly clear. It is difficult to know when the public will awake to the shortcomings of government policy, but it will almost certainly be sooner than expected.

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