UPDATE 1-Mainly pain-free Spanish budget focuses on nascent recovery
* Spain boosts 2014 growth, unemployment forecasts
* Government aims to hit fiscal targets without raising taxes
* Europe to review budget in November, implementation key
By Julien Toyer and Paul Day
MADRID, Sept 27 (Reuters) - Spain's government presented its most pain-free budget in years on Friday as a nascent economic recovery and lower borrowing costs put fiscal targets within reach without unpopular cuts to health and education spending.
Prime Minister Mariano Rajoy, almost half way into his four-year mandate, hopes the relatively benign budget and a slight improvement in the dismal unemployment rate will persuade disgruntled Spaniards they have left a long crisis behind them.
Rajoy's popularity plunged after he raised taxes and slashed spending last year to keep Spain from following Greece, Portugal and Ireland into an international bailout, and as corruption scandals rock his ruling People's Party.
Next year's budget for the euro zone's fourth biggest economy was based on a forecast that Gross Domestic Product will expand by 0.7 percent next year, up from an original outlook of 0.5 percent.
"This is the budget of economic recovery, it's the budget that will allow us to open the door to job creation in our country," Finance Minister Cristobal Montoro said at a news conference on Friday after Rajoy's cabinet approved the budget.
The government also said the jobless rate would come in at 25.9 percent in 2014, slightly better than an earlier forecast of 26.7 percent, but not enough to significantly boost tax revenue or revive moribund consumer spending.
Spain is just emerging from a two-year recession, with the economy expected to expand slightly in the July-September period this year.
Rajoy is counting on the recovery to pave the way for tax cuts before 2015, to give his party an electoral boost.
Although the government has not cut spending on education and health, it did pass a reform of the public pensions system on Friday that it has said will save 800 million euros next year, and 33 billion euros over the next decade.
With a shrinking birth rate and aging population, like most of the rest of Europe, Spain's pension system has become unsustainable. Currently, only 17 million workers support 9 million pensioners and 6 million unemployed.
Deputy Prime Minister Soraya Saenz de Santamaria said on Friday that Spain will have 15 million pensioners by 2040.
Under the new rules approved by the government pension payments will be calculated under a complex formula including economic health, the number of pensioners and the financial situation of the social security system.
The budget bill and the pension reform move to Parliament on Monday, where they are expected to be approved without much struggle. The ruling party has an absolute majority in the lower house and the Senate.
The budget did not contain any deficit surprises as the euro zone debt crisis has eased and last year's soaring borrowing costs have been left behind.
Montoro said the cost of financing the country's debt next year will fall by 5.2 percent in 2014 compared with 2013.
Spain revised the 2012 deficit figure to 6.84 percent of GDP, lower than previously calculated, Montoro said on Friday. Next year the budget gap must narrow to 5.8 percent of GDP, a significant improvement for Spain, yet it will remain one of the highest in Europe.
That left the government with less than 8 billion euros ($10.78 billion) to find to square the budget circle next year, a goal that should be hit thanks to lower interest rates and a new freeze in civil servants wages.
Money will also be saved thanks to another law approved on Friday to remove inflation-linked review of public prices and indexes used by public administrations.
The next challenge for the government is to come through with a wide-ranging tax reform in the spring to Spain's tax system more in line with the rest of Europe.
The new regime is expected to close loopholes on corporate tax and switch some products from a super-low Value-Added Tax category into a higher VAT category.
Spain's premier must convince the European Union that he can overcome voter resentment and implement the pension reforms and other overhauls of the country's economic structure.
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