Can the 2013 achieve the economic targets?

After more than four years fighting against the economic recession, it seems that 2013 can be the turning point for some countries. United Kingdom is expected to get out of the recession this new year, as forecast announces an economic growth of 1.2% of Gross Domestic Product (GDP). However, the hit European countries, in which Spain is part of, will continue into stagnation. Spanish prevision of growth in the next year is still downturn, with a minus 1.2% decrease of the GDP in 2013.

UK´s economic strategy “is focussed on reducing the deficit, restoring stability, rebalancing the economy and equipping the UK to compete in the global race”, as the Chancellor of the Exchequer, George Osborne, explained in the Autumn Statement to Parliament on 5 December 2012. On the other side, Spanish austerity measures have only contributed to increase unemployment (up to 25%) and to provoke more social unrest.

However, it it necessary to remark that neither UK nor Spain are likely to kept their forecasts of deficit reduction in the year that has just entered. The objective of Spanish deficit was 6.3% of GDP at the end of 2012, “but it could be (above that),” as the Bank of Spain governor, Luis Maria Linde, said last December 2012; although estimations yet predict Spanish deficit to drop to a 4.7% of GDP in 2013. On the other side, UK will also miss its deficit target from the 2013-2014 financial year, as the Autumn statement announced an escalation to 5.9pc of GDP, or £98bn, as Mr. Osborne indicated (hm treasury, Dec 5th, 2012). This data would indicate that the UK deficit next year could be higher than the Spanish's.

Therefore, new cutting measures will be necessary to reduce deficit and the extensive public debt. UK budget cuts are not significant, only 1.5% real cuts during 2012, if compared with Spanish ones where the most striking difference is that Spain does not include any measure to support growth as UK has setting up. For example, UK new policy includes increasing funding for UK Trade and Investments or helping smaller and medium-sized businesses access finance and support “from £25,000 to £250,000 for two years” as Mr. Osborne set out in the Annual Autumn Statement. This strategy can probably be the best solution to alleviate the financial situation; something that the European Union also instituted in its programme 2007-2013 “new funds, better rules”.



Way far to fix it
The real side of the story is that both countries need better alternatives to achieve economic growth that will be able to help cut deficits and debts still further, as more taxes are collected. Even though GDP might start growing between 2013-2014, the increase on borrowings for UK and the huge debt Spain owns, will provoke at the same time an intensification of interest returns for these countries. Deficit must become surplus and debt might decrease to have real economic growth.

The Chancellor, George Osborne, has presented the Government’s Spending Review in the hm treasury that shows the government spending on debt interest and the large amount of money borrowed as part of total of budget 2012:



“Last year the Government borrowed one pound in every four that it spent and the UK currently spends £43 billion on debt interest, which is more than it spends on schools in England,” explains Mr. Osborne in this review. State spending still grows at a higher proportion than collecting taxes. The problem is that any government can not keep borrowing money to pay debt interest from an income that it does not receive. UK public sector net debt was 68.5% of GDP at the end of November 2012, an equivalent of £1083.6bn (£1.2bn higher than the same period last year), as the Office for Budget Responsibility (OBR) states in the economic and fiscal outlook on December 2012.

Spanish situation does not look any better. The boom of the housing bubble burst far deeper in Spain than in UK, making Spanish property market collapsed, construction plummeted and unemployment rose. This situation made public debt to increase until 89.6% of GDP in 2012. Also, the inability of Spanish authorities to control the public sector deficit along with the enrichment and mismanagement of high bank charges was the penalty spot to ask for financial assistance to the Euro zone; what will add plus interest to the current debt. Facts show that Spanish debt will start decreasing in 2017, where it will already reach a 96.3% of GDP, as the Spanish version of the economist illustrated (Sept 27th,2012).


This issue is linked to other concepts. The interest and exchange rates are really low, what it makes easier to borrow money. British government securities zero coupon nominal yields at five years, for example, were 0,80 in November 2012, according to the Bank of England (BoE) statistics. Also, the interest rates of the European Central Bank (ECB) were 0,75 in July 2012 with the purpose of keeping inflation under control. However, this might not last forever. Interest rates will increase and the additional cost of borrowing money will triple. At this point, it will be necessary to find more money to cover debt interest. Here is where the financial system would collapse because the huge accumulating debt will be impossible to pay back, as Moneyweek report announces.

Recently, the BoE rejected major changes to the Retail Price Index (RPI), that “could have significantly cut government borrowing costs,” (Jan 10th, 2013). Those changes could have brought RPI closer to the lower Consumer Price Index measure of inflation (CPI) now standing at 2.7%, compared to a 3.0% RPI inflation in November. Nevertheless, wages are not keeping pace with inflation, where the former is 1.30%.

Nonetheless, UK remains an independent monetary policy and exchange rate that make it easier for them to control their economy a bit more than their Eurozone neighbours. By contrast, Spain does not have the ability to devalue the exchange rate or to print money, as UK has done. Apart from that, being part of the Eurozone has made Spain to see a decline in competitiveness compared to the Eurozone average.

But there is more to look at. For example, UK is planning a radical state pension reform since the complexity and uncertainty of outcomes in the state pension prevail; although UK benefit spending is a record high. On the other side, the inflation rate in Spain was recorded at 2.90 percent in November of 2012 by the National Institute of Statistics (INE). Austerity measures to cut the deficit in Spain have probably been much tougher than in UK, especially referring to increase taxes as VAT. However, inflation-linked reviews of pensions and wages have been frozen or even reduced.

All these measures have affected job losses. In UK, the unemployment rate was 7.8% of the economically active population last October 2012, according to the Office National Statistics (ONS) in its labour market statistics (Dec 2012). This rate makes a total of 2.51 million unemployed people in UK. However, in Spain over 25% of the population is unemployed; in which young unemployment make a total rate of 51% between 16-25. This problem is related with a huge migration movement around the world. In this case, UK is willing to impose border closures next summer due to the massive entrance of Spanish and other nationalities into the country.

How to reach growth
Economics in Europe are going all over the place imposing measures about cut spending, pensions and benefits and raise taxes aggressively to bring public debt under control. However, some countries are doing better than others. Here in UK the Office for Budget Responsibility (OBR) was created already in 2010 “to provide independent and authoritative analysis of the UK’s public finances”, states the Office itself. This is exactly the proposal for the reform plan 2013 in Spain to “guarantee strict compliance with budgetary policy,” said Economy Minister Luis de Guindos.

The main problem for both economies is the continued increase of borrowings, what it is making national debt and its interest difficult to solve. The second big hurdle is the considerable amount of state spending (more than what taxes can collect). Moreover, the most worrisome matter is that none of these two countries are making enough efforts to increase productivity, help businesses and unemployed people to boost their economies to a real economic growth.

However, the structural deficit in Spain makes it more difficult for it to face the financial situation. “Spain needs to undertake ambitious labor market reforms and competition-enhancing efforts, as well as banking sector reforms”, as the International Monetary Fund (IMF) states in its Spanish financial sector on November, 2012. Maybe, the World Economic Forum can find a way out to the prolonged global economic malaise in its annual meeting in Davos, Switzerland next 23-27 January, 2013.