Spain May Need Deeper Spending Cuts in 2012, Salgado Says

Spain's Finance Minister Elena Salgado
Spain's finance minister Elena Salgado. Photographer: Jock Fistick/Bloomberg

Spanish Finance Minister Elena Salgado said the nation might need to endure even deeper spending cuts next year than those approved by Parliament yesterday as it battles to stave off Europe’s debt crisis.

Lawmakers backed a limit on spending, the first stage of drafting next year’s budget, after Salgado said the 3.8 percent spending reduction laid out in the plan may have to be expanded by September when the government sends the budget bill to Parliament for approval.

“We don’t rule out that in September, when the budget project for 2012 is brought to Parliament, the spending limit may be lower than the one presented today,” Salgado told a session of lawmakers in Madrid. “It is more necessary than ever to show our firm commitment towards austerity.”

Spanish bond yields soared to a euro-era record yesterday and Ireland’s credit rating was cut to junk by Moody’s Investors Service after European finance ministers failed to reach a decision on how to stem the Greek crisis. Spanish Prime Minister Jose Luis Rodriguez Zapatero, a Socialist who is implementing the deepest spending cuts in three decades, called on the euro region’s “most powerful” nations to assume their “responsibility” to stem contagion across the region.

The spending limit of 117.4 billion euros ($165 billion), passed at a Cabinet meeting on June 24, was backed by 170 lawmaker votes, with 145 against and 18 abstentions, Parliament Speaker Jose Bono said. The Socialists have 169 seats in the 350-seat chamber.

Bond Yields

Spanish 10-year bond yields fell to 5.75 percent today, from 5.85 percent yesterday, narrowing the spread over equivalent German securities to 306 basis points.

Spain aims to rein in the euro region’s third-largest deficit to 6 percent of gross domestic product this year from 9.2 percent in 2010, and 4.4 percent next year. Zapatero has slashed public wages, frozen pensions and axed benefits in his fight to tame the shortfall.

Spain’s economy probably grew in the second quarter and the expansion will accelerate in the second half of the year, Zapatero told Parliament today in a weekly debate. The economy expanded 0.3 percent in the first three months of the year, even as the unemployment rate remained above 21 percent.

Zapatero’s Challenges

Zapatero faces the twin challenges of convincing investors he can rein in the deficit and staying in power until his term ends in March 2012. His winning approval for the spending limit yesterday could increase his minority government’s chances of getting the budget through Parliament by the end of the year. Failure to pass the budget would strengthen opposition calls for early elections.

Measures to stem the increase in debt, such as raising the retirement age, have prompted protests throughout Spain. A poll published by El Pais on July 3 showed 50 percent of Spaniards want early elections. The opposition People’s Party, which handed the Socialists their worst local-election defeat in three decades in May, would win 45.9 percent in an election now, compared with 32.1 percent for the Socialists, a poll by El Mundo newspaper showed on June 5.

Zapatero declined to comment on the timing of the elections this week, saying that the country currently needs stability more than anything else.

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