Spain Lawmakers Back Spending Plan as Rajoy Seeks Full Term

  • Rajoy’s minority governent made tax concessions to pass bill
  • Securing budget for 2018 will give Rajoy breathing space

The Spanish Parliament approved Prime Minister Mariano Rajoy’s spending proposals for 2018, the first step toward passing a budget, after the minority government agreed to tax cuts and more funding for regions to bring its rivals onside in an effort to cement his term.

Lawmakers voted 175 to 173 to endorse the government’s plan setting government spending at 119.8 billion euros ($137 billion) next year, a 1.3 percent increase on the 2017 budget. The parliament in Madrid also voted in favor of the government’s deficit-reduction plan, which should see Spain reducing its shortfall to 3.1 percent of output this year from 4.5 percent in 2016. The government is targeting 2.2 percent in 2018.

The vote follows two weeks of flip-flopping that exposed the fragility of Rajoy’s minority administration. Pushing through his financial plan is a key test for the 62-year-old prime minister, who aims to serve a full second term despite being stripped of his overall majority in December 2015. Getting a budget for next year approved matters because it would place Rajoy on a stronger foot to serve until at least 2019, when regional elections are due.

“The economic backdrop could not be better for Rajoy -- he has no incentive to risk an early election,” said Antonio Barroso, a political risk analyst at Teneo Intelligence, in a telephone interview. “He’s going to sit down and negotiate to get a budget approved and meet his deadlines. This is a stick-to-business government.”

The green light from parliament came after Budget Minister Cristobal Montoro ceded to pressure from the liberals of Ciudadanos to introduce a tax cut of approximately 2 billion euros for lower-income workers after initially rejecting their demand. Montoro also agreed to give regions more space to bring down their deficits, raising their target to 0.4 percent from an initial goal of 0.3 percent he’d set less than a week earlier.

For a look at details of Rajoy’s spending plan, click here.

Speaking to legislators on Tuesday, Montoro said getting the plan approved was crucial to maintaining Spain’s economic recovery, which is now entering its fourth year, and to continue reducing the deficit. The government aims to present its budget plan for 2018 in September, as it prepares to face off a challenge from the Catalan regional government over a referendum of independence in October, which officials in Madrid oppose.

The 2018-2020 fiscal plan envisions economic growth of 3 percent this year compared with a previous forecast of 2.5 percent in March. Unemployment is seen dropping by the final year to 11.8 percent from 18.8 percent in the first quarter of 2017. Despite the decline, the jobless rate would still be higher than the record-low 7.9 percent registered in 2007, before the collapse of the housing bubble.

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