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Zapatero Wins Spending Vote, Setting up Budget Fight

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Jose Luis Zapatero
Jose Luis Zapatero, prime minister of Spain, speaks at a news conference during the Group of 20 summit in Toronto. Photographer: Andrew Harrer/Bloomberg

July 21 (Bloomberg) -- Spanish Prime Minister Jose Luis Rodriguez Zapatero won parliamentary approval for next year’s spending plan by four votes in the first phase of a battle over the 2011 budget that could decide the fate of his government.

Aided by 13 abstentions, Zapatero’s Socialists carried the vote 170 to 166, Speaker Jose Bono said yesterday in Madrid. Smaller groups including the Basque Nationalist Party that Zapatero relied on to pass his minority government’s program voted against the spending limit, which is the first stage of the budget process.

Zapatero also lost a separate, non-binding vote yesterday calling on the government to scrap a freeze next year on pensions, part of the austerity plan passed in May. The motion was carried 178-163, increasing pressure on the government to backtrack on the measure.

As a 20 percent unemployment rate and the deepest budget cuts in three decades erode support for the government, Zapatero has also lost the backing of smaller parties in parliament that he relied upon. He pushed through emergency austerity measures with a margin of one vote on May 27, and failure to pass the 2011 budget by the end of the year would probably bring down the government.

Zapatero has riled unions and some members of his Socialist party with a policy U-turn aimed at cutting the third-largest budget deficit in the euro region and stemming a surge in borrowing costs.

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 by paring public workers’ pay by 5 percent, reducing infrastructure investment and raising taxes.

Bond Spread

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 169 basis points yesterday from 176 basis points a day earlier.

Zapatero has also prompted criticism from traditional allies by changing labor legislation to make it cheaper for companies in difficulty to fire workers and for firms to opt out of wage bargaining deals. That, coupled with plans to raise the retirement age, has prompted the two largest unions to call a general strike on Sept. 29.

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. CiU, a pro-business, nationalist Catalan party, warned Zapatero in May he couldn’t count on its 10 votes for the final budget vote while the Basque Nationalist Party, which voted against yesterday’s plan has yet to decide whether it will lend its support, and at what price.

Backing 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. A survey published by La Gaceta newspaper on July 11 showed a 9.6 percentage-point lead over the ruling Socialists.

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

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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