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

MADRID Thu Sep 27, 2012 7:59pm EDT

1 of 9. Protesters shout slogans during a protest against cuts in public education in central Madrid September 27, 2012.

Credit: Reuters/Susana Vera

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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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Comments (2)
LEEDAP wrote:
“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.”

With a 15% increase in the VAT and an over 7% decrease in central Government spending, demand will certainly decrease and an estimate of a 0.5% recession certainly looks optimistic. But I don’t see how reduced expenditures by the Government will do anything but increase the recession. Debt is a problem but reducing Government spending to reduce the debt just increases the recession and reduces the Government’s ability to pay down the debt. Is it only me and Paul Krugman who can see this?

Why don’t politicians look at ways to increase GDP while limiting debt growth? If you grow GDP faster than the debt, you take care of job growth and debt capacity at the same time.

One difficulty is that simple, generalized macro economic policies tend to be somewhat ineffective. Efforts have to be focused on investments with the highest economic and job multiples. Interestingly I just learned that supporting the arts is one way (http://www.reuters.com/video/2012/09/27/reuters-tv-the-exchange-the-bair-truth?videoId=237508926&videoChannel=117785&refresh=true). Education funding for science and technology programs and health practitioner training also has a high ROI.

If reduction in Government spending is needed, look no further than military spending and subsidizing the oil industry, agriculture, mining, timber, and broadcasting. These all have a negative ROI, fill the pockets of the already rich, and produce few jobs per dollar spent.

Why don’t conservative governments look at finances this way? If Romney looked at Government spending this way I might be more inclined to vote for the “businessman”. What’s Spain’s excuse?

As for revenue generation a VAT will increase costs, drive consumption down, hurt job growth and is regressive. Any tax that hurts the poor, drives down demand and job growth is as likely to help the recession as debt reduction.

Given the statements by this Government, it seems that their intent is to have to reduce the size of the Government just like the US’s GOP. They’ll have to work quickly though. They’ll only have one term to get it done.

Sep 27, 2012 6:07pm EDT  --  Report as abuse
McBob08 wrote:
And Spain joins the ranks of people who haven’t learned from history. Austerity just doesn’t work. It’s been proven time and again — recovery only comes when you tax and spend. You have to spend your way out of a recession; that is an economics fact. Cutting spending is just going to extend the recession, but leave the people stranded without sufficient government services when things get really bad for them.

Austerity is a solution that only serves businesses and the rich, because you’re refusing to make them pay their fair share for the society and government they are equally responsible for. I hope those anti-austerity protesters turn into revolutionary forces that push out that irresponsible government and replace them with one that will tax and spend like they should.

Sep 27, 2012 9:27pm EDT  --  Report as abuse
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