MADRID (Reuters) - Spain announced deep cuts to its central government budget on Friday as it battles to convince European partners and debt markets it can rein in its budget deficit in the face of growing complaints from the public.
The government said it would make savings of 27 billion euros (22 billion pounds) for the rest of 2012 from the central government budget, equivalent to around 2.5 percent of gross domestic product. The figure includes tax rises and spending cuts of around 15 billion euros announced in December.
The cuts come despite popular resistance - a general strike on Thursday disrupted transport, halted industry and saw some minor violence - and against a grim economic backdrop; Spain is thought to have fallen back into recession in the first quarter and has the highest unemployment rate in the European Union.
“Everyone knows the difficult problem we face in this country, and it calls for special efforts in fiscal consolidation and structural reforms to grow and create employment,” Deputy Prime Minister Soraya Saenz de Santamaria said after the weekly cabinet meeting.
The centre-right government, which swept to power in November with the largest parliamentary majority in 30 years, has already passed labour market and banking sector reforms that it says can improve competitiveness and reduce wage costs.
EU partners have agreed to let Prime Minister Mariano Rajoy aim for a total 2012 deficit at 5.3 percent of gross domestic product, a less demanding goal than the 4.4 percent originally suggested but substantially less than last year’s 8.5 percent.
Speaking in Copenhagen after an EU ministerial meeting, Spanish Economy Minister Luis de Guindos said the measures would be implemented as soon as possible, adding that any suggestions that Madrid needed emergency international funds was “absurd”.
Spain is trying to assure its EU partners that it is in control of slashing its deficit and to avoid needing a bailout package like that of smaller neighbour Portugal.
“What comforts markets are domestic policies. If we don’t do what is needed, then there will be no rescue fund that is big enough,” de Guindos said.
Finance ministers agreed on Friday to increase a financial firewall to 700 billion euros to ward off fears the euro zone debt crisis could spill over to Spain or Italy, much larger economies than those bailed out previously.
The Spanish government said it was aiming for a central government deficit equivalent of 3.5 percent of GDP, a deficit of 1.5 percent of GDP coming from Spain’s regions and a balanced social security budget. Smaller local authorities expect a deficit equivalent to 0.3 percent of GDP.
The regions announced a deficit of 2.9 percent of GDP in 2011, meaning they would have to cut around 15 billion euros to meet the 2012 target.
Details were scarce, with the government due to set the budget before parliament on Tuesday, but some economists are concerned that deep austerity measures could hurt already weakened growth and further endanger the deficit targets.
The government said it would slash spending by 16.9 percent across the ministries, with spending at the Foreign Ministry cut by more than half, and the Industry, Energy and Tourism Ministry taking a cut of more than 30 percent.
Total cuts of over 42 billion euros, between the central administrations and the regional authorities, could be tough for an economy struggling to grow, economists warn.
“This is as austere as it gets. It’s a tightening of fiscal policy until the pips squeak. There can be no doubting the government’s willingness to curb Spain’s excessive budget deficits,” said Nicholas Spiro at Spiro Sovereign Strategy.
Rajoy can ill afford to upset nervous bond market investors, who pushed the yield premium for Spanish 10-year debt on Thursday close to their highest levels since early January.
The premium investors demand to hold Spanish over German debt dipped slightly after the budget announcement to around 356 basis points, suggesting a cautious welcome for the plan intended to improve Madrid’s ability to service its debt.
Investors fear, however, that the government may fail to deliver the budget cuts it is promising or will need to announce new measures before the end of the year which could hurt growth.
“I suspect that the government could be forced to implement further austerity measures later this year, with lingering economic downturn set to place additional strains on an already perilous budget deficit reduction plan,” said IHS Global Insight economist Raj Badiani. “The main risk is that the government’s tax revenue projections for 2012 look too optimistic.”
Additional reporting and writing by Paul Day; Robin Emmott and Dan Flynn in Copenhagen; Editing by Will Waterman and Alastair Macdonald
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