Spain Reduces 2011 Budget Spending by 7.7% in Attempt to Rein In Deficit

Spain proposed reducing spending by 7.7 percent next year in a budget that the minority Socialist administration may struggle to push through parliament.

Finance Minister Elena Salgado set a spending limit of 122.3 billion euros ($151.4 billion) for 2011, when she expects the economy to grow 1.3 percent after two years of contraction, she said after a Cabinet meeting today. The 7.7 percent decline compares with the initially budgeted level for 2010, she said. Unemployment, now at 20 percent, will average 19.4 percent in 2010 and 18.9 percent next year, according to a new set of forecasts that see a weaker growth outlook for 2012 and 2013.

Prime Minister Jose Luis Rodriguez Zapatero lacks a parliamentary majority and won approval for austerity measures yesterday by a single vote as past supporters voted against a freeze on pensions and public-wage cuts. That casts doubt on the future of his government.

“There’s a lot of political uncertainty, as you saw yesterday with the most important vote of the term being decided by one vote,” said Pere Puig Bastard, a professor at ESADE business school in Barcelona. “It’s going to be difficult for the government to buy the will of other parties.”

In the first stage of the budget process, the government will take the spending limit to parliament for approval, normally before July. Then the government negotiates with smaller parties as the bill makes its way through parliamentary committees before final approval by the end of December.

Early Elections

Last year, the government relied on support of the Basque Nationalist Party, which voted against the austerity measures yesterday. Josep Duran, a member of parliament for the Catalan CiU party, said yesterday in parliament that Zapatero should call elections if it he can’t pass the budget. Zapatero “is finished,” according to Duran, who said his party would not support the budget. The CiU’s 10 members abstained yesterday, assuring Zapatero’s victory on the austerity package.

Deputy Prime Minister Maria Teresa Fernandez de la Vega said at the press conference that the Socialists’ term hadn’t expired yet and that they intended to continue governing. Zapatero’s mandate ends in 2012 and Salgado said she was “confident” the budget would win enough support to pass.

Excluding interest payments, for which the Finance Ministry budgets “conservatively,” the decline in spending will be more than 10 percent next year, Salgado said.

Spanish Yields

The budget cuts approved yesterday, which Zapatero agreed to as part of the European Union’s 750 billion-euro financial backstop for euro nations in trouble, have done little to convince investors that Spain can tame the deficit, bond prices indicate. The yield premium investors demand to hold Spanish 10- year bonds over comparable German debt was little changed at 152 basis points today, around 50 basis points more than when Zapatero announced the measure two weeks ago.

The IBEX-35 share index has lost 21 percent this year, more than the 3.5 percent loss in the Stoxx 600 Index of European shares, and is close to its level before the EU package was announced on May 10.

Zapatero canceled a trip to Brazil yesterday to attend today’s Cabinet meeting and to oversee talks between unions and employers over changes to labor legislation. Spain, which has the highest unemployment rate in the euro region, offers some of the best protection to long-term workers in Europe, according to the World Bank’s Doing Business Index. Still, a two-tier labor market has evolved, with an unemployment rate for young people of more than 40 percent and around a quarter of all workers are on temporary contracts.

Union Talks

If unions fail to reach a deal with employers, the government will propose its own legislation which it will discuss with other parties in parliament, Fernandez de la Vega said. Spain’s unions, which are already planning a public sector strike against the austerity measures on June 8, have threatened a general strike if worker protection is undermined.

Zapatero’s popularity has fallen since the budget cuts were announced. Support for the Socialists fell to 33.7 percent in a poll by Metroscopia published May 16 in El Pais newspaper. The PP has 42.8 percent. A poll by the Centre for Sociological Research, published on May 10, put the Socialists at 38 percent and the largest opposition party at 39.5 percent.

The government cut its growth forecast for 2012 to 2.5 percent from a previous 2.9 percent and for 2013 to 2.7 percent from 3.1 percent, the new set of estimates showed today. That’s still more optimistic that the International Monetary Fund, which sees the Spanish economy growing 1.5 percent in 2012 and 1.6 percent in 2013.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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