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Facing protests, Spain promises austerity

Friday, September 28, 2012    

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MADRID, Spain — Spain's government unveiled a 2013 budget that tightens austerity even in the teeth of growing protests yesterday, easing the path to a widely expected sovereign bailout.

The 2013 budget promises to meet Madrid's public deficit targets despite a deepening recession, a jobless rate of nearly 25 per cent and a surge in interest rate payments on the nation's debt.

Only old-age pensioners were spared in the slew of cuts, aimed at ensuring Spain complies with its commitment to the European Union to get the public deficit under control.

"It is a budget for a period of crisis, but aimed at getting out of this crisis," Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a cabinet meeting.

Defying growing market doubts, Spain vowed to meet its target of slashing the deficit from 8.9 per cent of total output last year to 6.3 per cent this year, 4.5 per cent in 2013 and 2.8 per cent in 2014.

"It is a major commitment to reducing the public deficit but also oriented towards economic growth and creating employment," Budget Minister Cristobal Montoro told a news conference.

The focus is on spending cuts, the government said, but retirement pensions are expected to go up by one per cent, sticking to a key pre-election promise of Prime Minister Mariano Rajoy's conservative government.

The other big item going up next year, however, is the cost of servicing Spain's public debt -- with interest payments alone forecast to leap 33.8 per cent to (euro) 38.6 billion.

To stay on track with its deficit goals, the government introduces a raft of measures in addition to a previously announced increase in sales and income taxes.

The Popular Party government will start taxing lottery winnings above (euro) 2,500 at 20 per cent, extend wealth taxes for another year and curb corporate tax breaks for depreciation.

To reassure markets of Spain's determination to meet its deficit-cutting targets, the goverment announced it would create an independent fiscal authority to check any budget slippages.

The formulation of the 2013 budget, to be followed by the release of an audit of Spain's sickly banking system on Friday, is seen on the markets as one of the final acts before a sovereign bailout.

If Spain formally requests the bailout, it would become eligible to benefit from a bond-buying programme for troubled states that was outlined by the European Central Bank (ECB) on September 6.

Such a programme would curb Spain's borrowing costs but to qualify Madrid would have to formally apply for help from the European Stability Mechanism (ESM) and submit to its conditions.

"Spain hopes that, with this budget, it is doing enough to qualify for support from the ESM and hence the ECB if need be," said Holger Schmieding, analyst at German private bank Berenberg.

"The Rajoy administration remains ready to do what it takes to turn Spain around but apparently wants to present all that it has to do as Spanish decisions, not as conditions imposed on Spain by outsiders," he said in a report.

Investors are concerned, too, about the northeastern Spanish region of Catalonia, which has called snap elections on November 25 in a drive for more independence from the rest of the crisis-hit nation and for greater control over its own finances.

Also sapping confidence is a joint statement by the German, Dutch and Finnish finance ministers on Tuesday "which cast doubt on whether the rest of the eurozone will bear any of the costs of providing support to Spain's banks", said Ben May, London-based analyst at Capital Economics.

If Spain has to foot the bill for restructuring of its banks, weakened by a 2008 property crash, its overall sovereign debt will rise and its deficit-cutting task will become even more urgent.

Already, the measures are facing resistance in Spain where a deepening recession has thrown millions out of work and many families into poverty. The unemployment rate is close to 25 per cent.

Thousands of protestors rallied near the Spanish parliament for a second straight night over the austerity measures Wednesday, and more protests were under way yesterday over the impact of education cuts.

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