US embassy cable - 04MADRID812

UNCLAS SECTION 01 OF 02 MADRID 000812 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, SP, Spanish Election March 2004, PSOE - Socialist Party 
SUBJECT: PSOE ECONOMIC ADVISOR:  IF YOU CAN'T BEAT THEM, 
JOIN THEM 
 
REF: A) MADRID 764 B) MADRID 604 
 
1. (SBU) Summary.  Spain's main opposition party, the 
Socialist Workers' Party of Spain or PSOE, faces the 
unenviable task of running against what is inarguably an 
impressive record of economic growth and job creation under 
the ruling Popular Party (PP).  According to Miguel 
Sebastian, the architect of PSOE's economic program, there is 
no point in denying the PP's record of success. 
Nevertheless, he argues that the PP economic model has run 
out of steam, as job creation slows and Spain continues to 
lag behind its EU peers based on unemployment rates, slow 
productivity growth and low levels of investment in R&D. 
Sebastian also attacks PP policies which he alleges have 
allowed housing prices to spiral out of control. With its 
emphasis on cutting income taxes, investing in R&D and 
maintaining budget discipline, PSOE's economic program echoes 
the pillars of a traditional right-of-center economic 
platform.  The key question is whether the PSOE can convince 
voters that its change in tone is one of true conviction 
rather than electoral convenience.  End Summary. 
 
New Economic Program for a New Spain 
------------------------------------ 
 
2. (U) Since last summer, gossip columns in Spain's financial 
press have been filled with juicy stories about infighting in 
the PSOE over the party's economic platform for March 14 
national elections.  During its time in opposition, PSOE 
economic luminaries have harshly criticized the PP's economic 
policy for its stinginess on social benefits, emphasis on 
balanced budget at the expense of pensioners, failed housing 
policies and fake job creation through temporary contracts. 
In early summer, PSOE drafted Miguel Sebastian, the chief 
economist of Spain's second largest bank BBVA to join its 
ranks and advise the party on its economic platform.  The 
move was widely seen rebuke to PSOE economic spokesman Jordi 
Sevilla and caused consternation among some rank-and-file 
party members.  More recently, PSOE's Presidential candidate 
Jose Luis Rodriguez Zapatero has stated in press interviews 
that he would appoint the highly-regarded Sebastian as 
Economy Minister should PSOE win the March 14 elections. 
 
3. (SBU) A long time contact of the Embassy, Sebastian 
described for us the difficult time he has had trying to 
convince some in PSOE's leadership (other than Zapatero) of 
the need for "a new economic platform for a new Spain." 
Sebastian argues that PSOE should never have lost the banner 
of the liberal economy -- it was PSOE that brought Spain into 
the EU and initiated reforms essential to bringing Spain into 
the euro zone. Yet many of PSOE's rank-and-file still see a 
Spain based on manufacturing jobs, not realizing that Spain 
has become a service-based economy.  Moreover, most Spaniards 
now own stocks and bonds.  They view economic issues very 
differently than ten years ago and are sophisticated enough 
to evaluate which party's economic policies will keep Spain's 
economy growing strongly. 
 
Simplify Taxes 
-------------- 
 
4. (U) Sebastian has crafted an economic platform based on 
changes to the tax code. On taxes, PSOE is calling for a 
decrease in the top personal income tax bracket to 27% 
(compared to the current 39%) while exempting pensioners and 
individuals who earn less than 12,000 euros annually.  The 
first 10,000 euros of income would be exempt from taxation 
(and 3000 euros more per child.)  Some presentations of the 
plan have talked of a "flat tax" or just two tax rates to 
simplify the code.  The government's accounts will be squared 
through more aggressive action against tax evaders and 
elimination of unspecified "superfluous" expenditures. 
Sebastian is convinced that these simplifications will 
encourage more Spaniards to pay their taxes and would 
certainly ease the ability of tax inspectors to fight tax 
evasion.  PSOE's economic program also echoes the Aznar 
government's commitment to balanced budgets.  Sebastian goes 
one step further, talking of requiring the government to run 
a budget surplus if economic growth exceeds three percent 
annually.  He also advocates controlling rapidly growing 
pharmaceutical expenditures paid by the government health 
service to keep them in line with GDP growth. 
 
More Investment in Training, R&D 
-------------------------------- 
 
5. (U) The PSOE economic program also focuses on the need for 
investment in R&D and investment in human capital to keep the 
Spanish economy competitive. To increase productivity, 
Sebastian argues that more investment in training workers is 
needed.  His goal is an increase over 1.5 percent annually in 
work productivity.  The fact that jobs on temporary contracts 
constitute almost a third of all salaried jobs is a 
disincentive for employers to invest in these workers and/or 
the equipment to make them more productive.  The Socialist 
platform notes the need to convert these jobs to part-time 
jobs rather than short-term contracts.  The PSOE also 
promises subsidies and other incentives to the private sector 
to encourage more R&D-related investment.  Sebastian believes 
Spain is capable of increasing such investment in R&D 
significantly and promises to reach EU targets in just a few 
years time. 
 
Rent Rather Then Buy 
-------------------- 
 
6. (U) With housing prices growing by about 17% last year, 
nearly one in five Spaniards now cites housing as issue of 
concern (ref B).  Attracted by historically low interest 
rates on mortgages, Spaniards over the past several years 
have been buying houses in record numbers and the supply of 
housing available for purchase is not keeping up with demand. 
 According to Sebastian, the problem is not the supply of 
housing per se -- thousands of apartments remain vacant 
because their owners perceive less risk just holding on to 
the idle property than renting.  PSOE is promising to 
introduce changes to incentivize a stronger rental market to 
encourage these owners to rent out now vacant apartments. 
 
Comment:  Imitation As Flattery 
------------------------------- 
 
7. (SBU) PSOE's economic program is chasing the middle class 
vote  - the new, increasingly prosperous Spain.  In the 
months before the official campaign kicked off, Sebastian and 
Zapatero met with business groups from around Spain to hear 
their concerns and reassure that a PSOE government would be 
pro-business. Sebastian seemed confident that they succeeded 
in persuading many of the regional business associations of 
PSOE's commitment to low taxes, a balanced budget and 
investment in R&D  -- many of the same goals voiced in the 
PP's economic strategy.  The PSOE seems to have decided that 
the only way to run against such a successful record on the 
economy was to cast itself as just as fiscally responsible 
and pro-business as the Aznar government. 
ARGYROS