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Spain Pledges Cuts to Meet Deficit Target as Bailout Looms

Spanish Prime Minister Mariano Rajoy’s nine-month-old government announced its fifth austerity package in what may be a move to head off tougher conditions demanded as part of a potential European bailout.

Rajoy’s Cabinet approved a new tax on lottery winnings and a cut in ministries’ spending as part of a 13 billion-euro ($16.8 billion) central government package to shrink the euro area’s third-biggest budget deficit. The target for 2013, which includes the regions and social security, is 4.5 percent of economic output compared with a 6.3 percent goal for this year.

“It’s a major push for the reduction of the budget deficit,” Budget Minister Cristobal Montoro told reporters today in Madrid. “We are making a major shared effort.”

The measures reflect Rajoy’s attempt to balance the demands of his European Union counterparts with voters demonstrating on the streets of the capital. He’ll raid the pension reserve fund to boost payments for retirees while unveiling a parcel of 43 separate measures that Economy Minister Luis de Guindos said exceed everything the EU has demanded for increasing growth.

Recommendations

Spain’s plan “responds to country-specific recommendations and goes even beyond them in some areas,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an e-mail sent while the ministers were speaking.

A 1 percent increase in payments to retirees will increase the pensions bill 4.9 percent to 122 billion euros while interest payments on Spain’s mounting public debt will increase 34 percent to 38.6 billion euros. At the same time, Rajoy is chopping 40 billion euros from his ministries.

The budget consolidation may yet be undermined by the performance of the Spanish economy which the government expects to contract by 0.5 percent next year. Economists expect a decline of 1.3 percent according to the median of 21 forecasts in a Bloomberg survey.

“They’ve increased the taxes for next year and cut spending but they didn’t change the growth forecast,” said Ricardo Santos, an economist at BNP Paribas in London. “We think that’s optimistic.” Santos expects output to fall 1.8 percent.

Creditor Demands

The steps may be enough to ease demands creditor countries such as Germany and the Netherlands would make in exchange for a financial lifeline. The government won’t decide whether to request aid until it has all the relevant information available and has had time to study it, de Guindos said.

“What the Spanish government is doing, and it’s what any responsible government would do when faced with this very important decision, is to be in contact with all the involved parties,” he said. A possible bailout “is a very important decision for Spain and also for the euro area overall.”

Spain will make more of its budget adjustment through spending cuts than increasing taxes next year even as it tries to shelter pensioners and the unemployed, Montoro said.

“The adjustment isn’t being made on social spending,” Montoro said. Social programs account for 63 percent of spending.

Central government revenue will rise 2.7 percent to 175.2 billion euros ($226 billion) next year while its spending will increase 5.6 percent, according to the blueprint. Spending cuts overall of about 8 billion euros will deliver 58 percent of the adjustment, it said.

Increased Taxes

In line with a plan sent to Brussels last month, the 2013 budget approved today increases taxes on lotteries, short-term capital gains and extended a wealth tax, and scraps rebates for large companies and mortgage holders.

Rajoy is stoking frustration among some European leaders for delaying a decision on whether to seek a bailout from the euro region’s rescue fund that would allow the European Central Bank to prop up the nation’s bond market.

The premier, who has spent close to two months saying he will consider it, said on Sept. 25 in comments to the Wall Street Journal that were confirmed by his office that he would “100 percent” seek help if bond yields remained too high.

Yields on Spain’s 10-year notes rose to a euro-era record of 7.75 percent on July 25. They’ve declined 5.95 percent in Madrid today, down 11 basis point.

Weighing Bailout

The Bank of Spain yesterday said early indicators suggest gross domestic product is still falling at a “significant pace” after the recession deepened in the second quarter. Data released this week showed the central government’s overspending overshot its full-year target in August as it bailed out the 17 semi-autonomous regions and the welfare system amid falling tax receipts.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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