April 25, 2012 / 11:56 AM / 8 years ago

Tightest Spain budget in decades passes hurdle

* Budget likely to win final approval by June

* First quarter central government deficit disappoints

By Paul Day

MADRID, April 25 (Reuters) - Spain’s tightest budget since the 1970s passed its first hurdle in parliament on Wednesday after disappointing first quarter figures fuelled concerns the government would miss targets for reining in its deficit.

Spain’s borrowing costs are rising and its economy is shrinking as it tries to deflate one of the highest budget deficits in the euro zone.

The lower house rejected amendments to the budget, which aims to shave 27 billion euros ($36 billion) off the central government accounts by the end of the year, in a first step to approving the measure.

But the ruling centre-right People’s Party, which has an absolute majority in parliament, failed to win hoped-for support from centre-right Catalan nationalist party CiU, which says the central government owes funds to Catalonia.

The 2012 budget, delayed due to the general election in November and a regional election in March, is expected to be put into law in June after further debate on minor amendments, and a vote in the upper house.

“We are in the beginning of the beginning in the solution of the economic crisis ... Nobody should mistakenly think we will not meet the deficit targets,” Treasury Minister Cristobal Montoro said in the parliamentary debate over the budget.

Spain spooked debt markets last month by unilaterally announcing a more modest budget deficit target. It has since agreed with the European Union to target 5.3 percent of gross domestic product this year and 3 percent by 2013, down from 8.5 percent of GDP last year.

Many economists fear the goals, which have also prompted reforms to health and education to slice a further 10 billion euros a year from spending, are too ambitious for an economy in its second recession since 2009.

The budget is the tightest since those during the country’s transition to democracy four decades ago.

CENTRAL DEFICIT DISAPPOINTS

On Tuesday, Montoro announced a central government deficit in the first quarter of 0.83 percent of GDP, down 1.1 billion euros on a like-for-like basis from last year, but still short of what will be needed to reach the overall target which includes regional government spending.

“They need to cut around 31 percent cut (on average) from the overall balance for the central government to be on target. They’ve done 11 pct in the first quarter, so the next three quarters will need to accelerate above the average,” Barclays Capital economist Antonio Garcia Pascual.

“So this is good because it’s moving in the right direction, but it’s not great because it’s not moving fast enough.”

The treasury ministry later said the real first quarter deficit figure was 1.85 percent of GDP, already half way to the 2012 target of 3.5 percent of GDP after just three months, due to emergency transfers for the struggling regions.

The real deficit figure would be brought back in line with the end of year goal as one-time transfers to the regions are absorbed into accounts through the year, the Secretary of State for the Budget Marta Fernandez Curras said.

“The data were disappointing, and reflects the enormous pressure on tax receipts from the continued sharp falls in both employment and domestic spending,” said IHS Global Insight economist Raj Badiani.

“This provides further evidence Spain is going to struggle to meet their public sector budget deficit targets ... Take away the artificial boost from net exports (lifted by collapsing import demand), Spain is in very deep recession.”

Some of the belt-tightening measures have been criticised for excessive optimism regarding their revenue potential, while other concerns have concentrated on the potential negative feedback loop on growth and income.

Bank of Spain Governor Miguel Angel Fernandez Ordonez said there were risks the cost-cutting measures would fall short and unpopular tax hikes would have to be considered if it looked like the deficit target would be missed.

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