As for the financial tensions that have shaken the Spanish economy in recent weeks, holding resolutely on a course towards fiscal consolidation is a pre-requisite for dispelling the mistrust stifling the economy. Therefore, the potential short-term costs will be amply offset once it becomes apparent that the efforts made are yielding results. The State and Social Security budgets for 2012 are pivotal to this strategy. Fortunately, while they have not yet been approved, many of the measures they envisage have already been implemented, thereby preventing precious time from being lost in adjusting the fiscal imbalance. In this respect, it should be stressed that cutting the budget deficit requires an unprecedented structural effort. The measures that have to be adopted must reduce debt in an environment in which the interest burden will be growing and where the double-dip in economic activity will affect tax revenue and some cyclical expenditure. In light of these conditioning factors, the consolidation strategy must obviously use all the instruments available, on both the expenditure and revenue sides. As regards revenue, various measures have been adopted affecting, above all, the direct taxes households and firms pay. A reduced rate has also been introduced to bring undeclared assets out into the open. Here, although the macroeconomic forecast for 2012 may be realistic, there are risks of slippage in projected revenue.
This is in light of the composition activity is likely to evidence, given the sizeable weight of exports and the weakness of private consumption and the real estate market, which may lead to lower revenue than the course of output might suggest, as was the case in 2011. The foreseeable decline in employment also appears to suggest Social Security contributions will be more modest than budgeted. Finally, there is substantial uncertainty surrounding projected revenue takings in respect of the special treatment accorded to undisclosed income. Turning to expenditure, the draft Budget outlines highly significant cuts in public investment, current transfers and goods and services purchases. These projections are not without risk, given the substantial inertia some of these items show, which hinders any permanent change in their trajectory. Precisely to reinforce this trajectory, the government added further education and health-care measures following the presentation of the draft Budget, which should contribute to attaining the targets set. That said, overspending on items such as unemployment benefits or pensions cannot be ruled out, since they depend on factors beyond the control of the authorities, such as the unemployment rate, demographics and inflation. Given these risks, the Budget must be rigorously implemented and mechanisms activated to enable any emerging deviations to be detected sufficiently in advance, so that additional countervailing measures may be taken. If this were necessary, measures to contain current expenditure or to increase indirect taxes could be adopted, as already contemplated in the Stability Programme ahead of 2013.