The minority government is gradually forging a more enduring alliance with the far-left Podemos, agreeing to the biggest pay rise in 40 years.
The 2019 budget envisages a 22% rise of the minimum wage.
The two parties have also agreed on pension and unemployment benefit rises, as well as additional investment in research and education. Additional spending is estimated to be in the tune of €5bn, a surge in spending that may well be opposed by the European Commission.
Speaking to El Pais, European Commission sources suggest Brussels would not look kindly to a surge in the minimum wage given unemployment at 15%. The rise in government spending takes places amid a fiscal standoff between Italy and the European Commission on the 2019 deficit target. .
Madrid is expected to pen a 2019 deficit target of 1,8% of GDP, up from 1,3% agreed with the previous government. In July Spain raised its 2018 deficit target from an estimated 2,2% to 2.7%, that is, the highest in the Eurozone.
The government argues that Spanish growth will fund additional spending. Finance Minister Maria Jesus Montero is not likely to back down on policy. Spain’s current 3,2% GDP growth makes this claim credible.
In any event, the Sánchez minority government may be soon facing elections.
His government depends on the support of Basque, Valencia, Canary Islands, and Catalan regional parties. However, pro-independence Catalan governing alliance (ECR and PdeCAT) have delivered the Socialist government with an ultimatum: there will either be a formal independence referendum or they will withdraw their confidence vote.
The policy shift to the left provides the Socialist with an electoral platform as Sanchez may soon be forced to call elections. The strategic alliance may also have benefits as the two parties head towards regional and European elections in 2019.