Last week Spain’s Socialist Prime Minister, Pedro Sánchez, struck a deal with Podemos, a left-wing party, that aims to improve the conditions of the country’s middle- and lower-income earners. While the agreement increases the chances that Spain’s 2019 budget will pass and that an election won’t be moved forward, it is by no means a sure bet. However, if successfully implemented, this cooperation will represent a significant step away from the austerity policies of Spain’s previous government.
After failing to win a no-confidence vote last May, Spain’s conservative government – run by Mariano Rajoy – resigned, paving the way for the Socialists to form a minority government. The new government has made it clear that it believes the country’s economy is strong enough to loosen the austerity policies that were first introduced back in 2011. Consequently, this new deal is a crucial mechanism by which Spain’s nascent government can differentiate itself from the previous administration.
Economic indicators suggest the government’s ambitions are reachable. While Spain does still have one of the highest debt levels in the Eurozone, its economy has registered remarkable growth rates. Between 2015 and 2017, the economy grew by an average of around 3.3 per cent, exceeding the Eurozone average of 2.1 per cent over the same period. Moreover, Spain’s economy is projected to expand by 2.8 per cent this year.
The government’s deal struck with Podemos states that “it’s urgent to reverse the scars of austerity, sew the social divide, reduce inequality, precariousness and poverty”. Consequently, the plan proposes a mix of both spending and tax increases. Taxes for those earning more than 130,000 euros a year will increase, and there will be a 0.2 per cent charge on share purchases of Spanish companies. Big businesses will also face higher levies. However, the most dramatic change relates to Spain’s minimum wage, which will increase from 736 euros to 900 euros per month – a whopping 22 per cent increase, the biggest in 40 years. Similarly, pensions, spending on unemployment and disability benefits, housing, and paternity leave will also rise.
Despite the backing of Podemos, there’s no guarantee that these policies will be adopted. Sanchez’s Socialist Party Members hold just 84 of the 350 seats in parliament. In combination with Podemos, the government will be able to garner 151 votes, still shy of the majority it needs to pass its budget. In light of the People’s Party’s opposition, the government will need to negotiate with smaller regional parties to make up the difference. Even if these parties are brought on board, the People’s Party controls the Senate and could kill the bill once it reaches the upper house.
On Monday a blueprint of the budget with the proposed spending and tax increases was sent to Brussels for review. It’s estimated that the spending initiatives will cost around 5 billion euros and the EU is unlikely to sign off an increase in spending that will significantly derail the trajectory of Spain’s deficit reduction. However, Spanish Finance Minister, María Jesús Montero, has tried to allay concerns by emphasising that any increase in spending will be offset by an increase in revenues from tax hikes and economic growth.
Interestingly, even if the budget isn’t approved, the deal with Podemos could act as the foundation for both parties’ election platforms. It’s therefore possible that this deal is the first step towards the formation of a new left-wing coalition in Spain.