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Spain plans severe spending cutbacks as bailout looms

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Spanish Prime Minister Mariano Rajoy

Spanish Prime Minister Mariano Rajoy

Spanish Prime Minister Mariano Rajoy

Spain announced a detailed timetable for economic reforms and a tough 2013 budget based mostly on spending cuts in what many see as an effort to pre-empt the likely conditions of an international bailout.

Ministry budgets were slashed by 8.9pc for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the eurozone's biggest deficits while unemployment benefit costs rise in a recession.

Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Mr Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because EU paymaster Germany insists Spain doesn't need help.

The conservative government said tax revenue would be higher than originally budgeted in 2012 -- partly due to a hike in value-added tax (VAT) -- and would grow by 3.8pc next year from this year.

Central government spending would be cut by 7.3pc while revenue would rise 4pc in 2013 including a big leap in VAT income. Regional budgets will be presented individually through the year. More details will be announced tomorrow when the proposal goes to parliament.

"This is a crisis budget aimed at emerging from the crisis ... In this budget there is a larger adjustment of spending than revenue," Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.

Spain, the eurozone's fourth largest economy, is now at the centre of the eurozone's debt crisis. Investors fear Madrid cannot control its finances and question whether Mr Rajoy has the political will to take all the necessary measures.

Aid package

Madrid is talking to EU authorities about the terms of a possible aid package that would trigger an ECB bond-buying programme and ease Spain's unsustainable funding costs.

Brussels has demanded an independent budget oversight entity, which Economy Minister Luis de Guindos said yesterday would be created to review budget execution. The government is still analysing potential conditions for aid, he said.

Uncertainty over Spain's ability to slash the public deficit to 6.3pc from close to 9pc last year, and control spending in regional governments, has been stoked by demands for independence in Catalonia. The autonomous region's parliament voted yesterday to hold a referendum on independence, but Mr Saenz de Santamaria said the region must consult the rest of the country first.

Pensions, earmarked by the European Commission as a key area for reform, will rise by 1pc next year, but Treasury Minister Cristobal Montoro would not be drawn on whether the government would pay an inflation catch-up which could be over 3pc this year.

Before the end of the year the government will announce a pension reform that will restrict early retirement.

The deputy premier said the government would set out 43 new laws to reform the economy over the next six months including reforms to the labour market, public administrations, energy services and telecommunications sectors.

The detailed timetable for economic reforms goes beyond what the European Commission has required and is an ambitious step forward, EU Economic and Monetary Affairs Commissioner Olli Rehn said in response to the government announcements.

"The reforms are clearly targeted at some of the most pressing policy challenges," he said.

Market reaction was cautious however. (Reuters)

Irish Independent