There's a lot more people saying that the budget cuts will shrink the tax base (government's revenue), thus it will worsen deficit to GDP ratios. Spain's government announced deep budget cuts this week, with the aim of reducing deficit to 6% of GDP this fiscal year. Among other cuts and measures:
- Public sector pay will be reduced by 5% this year and frozen in 2011.
- Pension rises will be shelved.
- The country’s €2,500 baby bonus will be cancelled.
- Aid to the regions will be slashed
- Infrastructure projects will be put on ice.
EMU's Internal Devaluation
The Telegraph says that Wage cuts amount to an "internal devaluation" within EMU. Stephen Lewis, from Monument Securities, says the EU is "pushing a clutch of countries into contractionary policies at the same time. These will feed on each other, creating a deflation bias across the region akin to the 'Gold Bloc’ in the 1930s".
"It is not a viable policy. Weakening demand will cause the tax base to shrink. If the population could see light at the end of the tunnel, they might put up with it, but there is no light: it is a long dark passage leading nowhere,".
"The EU cites the Irish austerity plan as a model, but Ireland has an open economy with a dynamic export sector, and may be sui generis. In any case, Ireland’s nominal GDP has fallen 18.6pc, without a commensurate fall in debt. Ireland is not yet safely out of its debt-deflation trap".