Sunday, September 27, 2009

A sign of things to come...Spain

In a release, the government [of Spain] said it now forecasts a total 2010 budget deficit equal to 8.1% of gross domestic product, compared to 8.4% previously, but still in excess of the 3%-of-GDP limit for users of the euro.
"The new budget maintains our commitment to social services, a productive economy and keeps our investment in research and development," Spain's finance minister Elena Salgado said in a meeting with journalists after Saturday's cabinet meeting.
Spending this year is shooting far over budget as the result of anti-crisis measures and spiraling unemployment benefit payments.
Following the collapse of the labor-intensive construction industry, nearly one in five Spanish workers is unemployed.
The European Commission, the EU's executive arm, has given Spain until 2012 to bring its deficit within 3% of GDP, the limit for users of the euro currency.
To help counter the shortfall, Spain's socialist government said it plans to raise a series of taxes to add nearly €11 billion to public coffers. In July of 2010 it will increase the general VAT tax to 18% from 16% and the special VAT tax, applied to services, food production and art objects to 8% from 7%.
The government will also scrap an annual income tax deduction of €400 per worker introduced last year and increase capital gains taxes.
The government's plans to raise taxes have been controversial, drawing criticism from opposition politicians, and some independent economists say it is too soon for Spain to start raising taxes with its economy still deep in recession.
While some European economies have already begun to show small positive growth rates, Spain isn't expected to do so until late next year.
18% VAT tax is insane in a depression. They should be reducing the tax not increasing it. (Or how about some off-balance-sheet transactions. Gee that would fix it in a giffy. Shazam - 3% of GDP. Call the JP Morgan guys or Bernake, they will show you how to do it.) The irony is that Spain will gain no revenue from any of these increases since already weak demand and buying power is simply being eroded further and that will just reduce consumption. So the net net is this action will reduce government revenue not increase it. This is why the EURO system will ultimately fail - it just does not makes sense.

Spain can not fix its deficit or account for the collapse in value of its domestic assets (which are not even discussed in their budget) with tax increases that will actually reduce revenue. Spain is only ONE of the problems on this one way street - Deflation Street. (Please read: The EURO - starting a trip to oblivion)

All it takes, is another shock...something like an inevitable systemic failure or a Bank of America, JP Morgan collapse...and the whole ponzi scheme will fall apart. Don't forget, the guys who designed the Euro reserve system are essentially the same guys who collapsed the dollar from 100 cents to 3.6 cents.

End The Fed
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