Spain’s €27bn budget cut aims to reassure

Spain announced deep cuts to its central government budget yesterday 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 €27bn for the rest of 2012 from the central government budget, equivalent to around 2.5% of GDP. The figure includes tax rises and spending cuts of around €15bn 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 EU.

“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 Sáenz 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% of GDP, a less demanding goal than the 4.4% originally suggested but substantially less than last year’s 8.5%.

The Spanish government said it was aiming for a central government deficit equivalent of 3.5% of GDP, a deficit of 1.5% of GDP coming from Spain’s regions and a balanced social security budget. Smaller local authorities expect a deficit equivalent to 0.3% of GDP.

The regions announced a deficit of 2.9% of GDP in 2011, meaning that they would have to cut around €15bn 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% 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%.

Total cuts of over €42bn, 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 bondmarket investors, who on Thursday pushed the yield premium for Spanish 10-year debt 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.

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