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Cablegate: Psoe Economic Advisor: If You Can't Beat Them,

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 MADRID 000812

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV SP PSOE
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

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