September 27, 2012 / 3:43 PM / in 5 years

Spain's crisis budget aims at spending cuts not tax rises

Protesters shout slogans during a protest against cuts in public education in central Madrid September 27, 2012. REUTERS/Susana Vera

MADRID (Reuters) - Spain announced a crisis budget for 2013 based mostly on spending cuts on Thursday in what many see as an effort to pre-empt the likely conditions of an international bailout.

Ministry budgets were slashed by 8.9 percent for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the euro zone’s biggest deficits.

“This is a crisis budget aimed at emerging from the crisis ... In this budget there is a larger adjustment of spending than revenue,” Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.

Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because European Union paymaster Germany insists Spain doesn’t need help.

The central government sees budget savings of 13 billion euros in 2013, with spending down 7.3 percent -- not including social security and interest payments -- and income rising 4 percent thanks to a 15 percent leap in value-added tax take.

The budget goes to parliament on Saturday and debates could last weeks. The country’s 17 autonomous regions still must present budgets and find an additional 5 billion euros in adjustments to meet overall public deficit reduction goals.

Spain, the euro zone’s fourth largest economy, is now at the center of the euro debt crisis. Investors fear Madrid cannot control its finances and question whether Rajoy has the political will to take all the necessary but unpopular measures.

Madrid is talking to EU authorities about the terms of a possible aid package that would trigger an European Central Bank bond-buying program and ease Spain’s unsustainable funding costs.

Brussels has demanded an independent budget oversight body, which Economy Minister Luis de Guindos said on Thursday would be created to review budget execution. The government is still analyzing potential conditions for aid, he said.

The conservative government said tax revenue would be higher than originally budgeted in 2012 -- partly due to a hike in VAT -- allowing it to comfortably cut the public deficit to 6.3 percent from close to 9 percent last year.

Uncertainty over Spain’s ability to control spending in regional governments -- which account for half of all public spending and could threaten the deficit goal -- has increased due to the Catalan demands for independence.

The autonomous region’s parliament voted on Thursday to hold a referendum on independence, but Saenz de Santamaria said the region must consult the rest of the country first.

PENSIONS WILL BE REVIEWED

Pensions, earmarked by the European Commission as a key area for reform, will rise by 1 percent next year but Treasury Minister Cristobal Montoro would not be drawn on whether the government would pay an inflation catch-up which could be over 3 percent this year.

In a sign of how tight the budget is this year the government said it would use 3 billion euros from social security reserves to pay pensions in 2012.

Before the end of the year the government will announce a pension reform to restrict early retirement and to review sustainability of the pension system which could open the door to accelerating an increase in retirement age.

The deputy premier said the government would set out 43 new laws to reform the economy over the next six months and including reforms to the labor market, public administrations, energy services and telecommunications sectors.

The detailed timetable for economic reforms goes beyond what the European Commission has required and is an ambitious step forward, the EU’s top economic official said on Thursday in response to the government announcements.

“The reforms are clearly targeted at some of the most pressing policy challenges,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

Market reaction was cautious.

“The first impressions (of the announcements) are good, heading towards a major adjustment in spending rather than in revenues,” said Jose Luis Martinez of Citigroup in Madrid.

“However, we see as too optimistic the macroeconomic assumption of 0.5 percent recession for the next year. We see a scenario with a deeper recession and if this were the case, further spending cuts will be needed.”

De Guindos’ statement that the 2012 budget deficit target would be met this year due to a solid increase in revenues will also be viewed with suspicion with many economists expecting the government to miss the objective.

Spending cuts continue to heap pressure on Spaniards and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police use force to disperse crowds.

A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes since a housing bubble burst in 2008 and plummeting consumer and business sentiment tipped the country into a four-year economic slump.

The prime minister’s image, both at home and abroad, has deteriorated rapidly since his party won an absolute parliamentary majority last November.

Newspaper pictures of Rajoy enjoying a cigar on Sixth Avenue in New York on Wednesday while protesters gathered in Madrid fuelled criticism of his detached attitude toward Spain’s mounting problems.

Additional reporting by Julien Toyer; Writing by Paul Day; Editing by Fiona Ortiz, Jeremy Gaunt, Paul Taylor and Giles Elgood

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