Zapatero Faces Budget Debate Rehearsal as Spain Government's Allies Mutiny

Spanish Prime Minister Jose Luis Rodriguez Zapatero is headed for a showdown with lawmakers that may determine how much longer his six-year-old Socialist Cabinet can hang on.

Tomorrow’s annual state of the nation debate will generate proposals for parliament to vote on next week, as Zapatero seeks to tame the euro area’s third-biggest budget gap amid defections by former allies after two years of economic contraction.

Zapatero pushed through emergency austerity measures with a margin of one vote on May 27, and failure on the 2011 budget in votes set for September would bring his government down. The regional Catalan party, CiU, put Zapatero on notice that day that its 10 members wouldn’t support the budget.

“The debate is important for us to see if the government has any chance of finishing the legislature in a way that’s in the least bit useful for the country, if they have the support and policies,” Pere Macias, a CiU lawmaker responsible for budget issues, said in a telephone interview.

The premier goes into the debate without backing from the smaller parties that had helped pass his minority government’s program and with the deepest budget cuts in three decades eroding his popularity. The budget shortfall was 11.2 percent of gross domestic product last year and the government aims to cut it to 6 percent in 2011.

Policy U-turn

Zapatero has riled unions and members of his Socialist party with a policy U-turn aimed at cutting the shortfall and stemming a surge in borrowing costs.

“There’s a chance that they fall, which is precisely not getting the budget through,” said Ken Dubin, a political science professor at Carlos III university in Madrid. “We’re going to have a really nasty debate,” he said, in what could be a kind of “rehearsal” for the budget discussions.

The annual debate often generates key proposals. Zapatero used last year’s event to announce that a tax rebate on mortgage payments would be scrapped in 2011, in a bid to encourage buyers to mop up excess housing. He also offered incentives to buy cars and announced 1 billion euros ($1.25 billion) in spending cuts.

Borrowing Costs

Those budget reductions have been extended since a surge in borrowing costs for southern euro-region countries prompted the creation of a 750 billion-euro financial backstop for struggling members and a call for austerity measures in return. The extra yield investors demand to hold Spanish debt rather than German equivalents reached a euro-era high of 233 basis points on June 17. The spread narrowed to 203 basis points today from 207 basis points yesterday.

Zapatero responded by cutting civil servants’ wages 5 percent, freezing pensions and scrapping a subsidy for new mothers. He then overhauled labor legislation to make it easier for companies to opt out of wage deals. He’s also aiming to raise the retirement age to shore up the pension system.

Those plans have prompted Spain’s two biggest unions to call a general strike for Sept. 29, and stirred discontent in his party.

Antonio Gutierrez, a Socialist lawmaker, refused to vote with the party to ratify the labor overhaul on June 22 and attacked the pension-system changes in a March opinion piece in El Pais newspaper. At least three Socialist legislators refused to join in a standing ovation when Zapatero announced the austerity measures on May 12.

“The legitimacy of the Zapatero government has been deeply eroded,” Sebastian Balfour, a political science professor at the London School of Economics.

‘Inevitable Consensus’

Deputy Prime Minister Maria Teresa Fernandez de la Vega said the debate will be an “opportunity to forge the necessary and inevitable consensus” to push the economy back to growth. The budget will be approved “of course,” and the government has no plans for early elections, she said in an interview with Cadena Ser radio today.

The policies have alienated small parties that define themselves as leftist and used to provide votes to Zapatero, who is seven seats shy of a majority. The Basque Nationalist Party, a former ally, suggested it may not support the budget as that would mean “giving Zapatero political life or not,” Pedro Aspiazu, the party’s economic spokesman, said in an interview last month.

Support for Zapatero is also waning among voters. A poll by ABC newspaper published on June 14 showed the opposition People’s Party, which has started billing itself as the party of “workers,” opened up an 11.8 percentage point lead over the Socialists.

“The debate is a test,” said Alfredo Pastor, a former deputy finance minister and professor at IESE business school. “If the debate of the nation goes well, there will be support for the budget; if not, then we’ll just have to see.”

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

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