Spain to cut more spending, may fail to reach EU target

Fri Mar 2, 2012 5:15am EST

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* Hefty spending cuts for 2012 to be released on Friday

* New economic forecasts to be presented

* EU agreed 4.4 pct deficit target likely to be missed

By Carlos Ruano

MADRID, March 2 (Reuters) - Spain will announce on Friday tough cuts to spending this year but is unlikely to reduce its deficit target to the level agreed with the European Union, putting pressure on Brussels to ease its budgetary demands.

Spain is emerging as a test case of whether Europe is willing to ease fiscal rules that heap more austerity cuts on member states grappling with stunted growth, high unemployment and an increasing number of street demonstrations.

The government will present its spending plan for Spain's public administrations, including 17 autonomous regions. The plan will add to cuts worth around 15 billion euros ($20 billion) announced in December.

Government sources said new economic forecasts accompanying the spending plan would probably show Spain missing the 4.4 percent deficit target for this year - a milestone agreed with the 27-member bloc before reaching a 3 percent deficit in 2013.

Rajoy hopes to gain support from other European countries at a summit on Friday, even if some at the European Commission have voiced concern over any relaxation of the deficit, fearing financial markets would lose faith in the future of the euro zone.

The government said this week the deficit for 2011 was 8.5 percent of gross domestic product, 2.5 percentage points higher than its target.

Cuts of around 44 billion euros are needed to reduce the deficit to meet the target this year, and are expected to further plunge the country into recession.

Analysts say an additional 15 billion euros of cuts would cut the deficit to a more realistic 5.5 percent this year.

"The important thing is to set a convincing objective, ruling out the 4.4 percent target that would be harmful to credibility," said Estefania Ponte, economist at brokerage Cortal Consors.

Credit ratings agency Fitch backed Spain's push for a more lenient deficit objective for this year, while still aiming to hit the 3 percent target set for 2013. The agency said it would not hurt the country's ratings to have a realistic target.

The European Commission forecast that Spain's economy would contract by 1 percent this year. The International Monetary Fund and Bank of Spain expect it to fall around 1.5 percent.

Bleak February jobless figures showed on Friday the pressure Spain's economy is under as it struggles to restart growth while fighting the highest unemployment rate of developed countries.

Spain's jobless rate rose by 2.4 percent in February from a month earlier, leaving 4.7 million people out of work. Spain accounts for nearly one third of all those without work in the European Union.

The prospect is even worse for people under 25, with one in two Spanish youths unemployed - a key concern for Spaniards, many of whom have taken to the streets to protest cuts in education and health.

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