Spain presents harshest budget since time of Gen Franco

Wed, Apr 4, 2012, 01:00

SPAIN’S GOVERNMENT, grappling with €57 billion in combined annual costs for debt servicing and jobless benefits, will tolerate “no excuses or pretexts” from wayward autonomous regions in its drive to cut the public deficit, according to the budget minister.

Cristóbal Montoro described the situation as “extreme, at the limit and exceptional” as he presented parliament yesterday with the harshest budget since the death of dictator Gen Francisco Franco, comprising central government spending cuts and tax rises worth €27.3 billion.

Prime minister Mariano Rajoy admitted the budget was unpleasant, but said it was “necessary because the alternative to it is infinitely worse”, in reference to a possible default or rescue by the European Union.

His centre-right administration is under orders from the EU to cut its overall public deficit by more than 3 percentage points in a year, reducing the shortfall from 8.5 per cent of gross domestic product to 5.3 per cent in 2012.

Mr Montoro set aside €28.8 billion for jobless benefits in the budget – roughly the same amount as for the government’s interest payments on debt.

Economists and analysts are not convinced Mr Rajoy and Mr Montoro will be able to control the 17 regions responsible for most of the overshoot in last year’s budget. The regions run education and health, and some are reluctant to cut back.

Mr Montoro also faced criticism for cutting the research and development budget by a quarter, while leaving less productive subsidies and wage bills almost untouched.

Investors’ nerves about euro zone members Spain and Italy – and the possibility of their needing to follow Greece, Ireland and Portugal into bailout programmes – have been reflected in volatile sovereign bond markets. Yesterday, the yield on Spain’s 10-year bonds, a measure of perceived risk, was up seven basis points by the afternoon to 5.42 per cent.

The mood was darkened by Spanish labour ministry figures showing that the number of registered unemployed rose for the eighth consecutive month to 4.75 million. By other measures,Spanish unemployment is already above five million and affects more than one-fifth of the workforce.

In his budget presentations, Mr Montoro emphasised that Spain’s predicted level of public debt at the end of this year of 79.8 per cent of GDP would be well below the euro zone average of 90.4 per cent. Spanish public debt, however, is rising fast and, in a way, that demonstrates how the regions can undermine the plans of the central government.

Although the central government plans to raise only a net €36.8 billion, or 3.5 per cent of GDP, through bond auctions this year to cover its own deficit, total public debt is set to rise by 11 percentage points of GDP from the 68.5 per cent of 2011.

Economy ministry sources said the additional debt included 3.1 percentage points for a scheme to pay overdue bills to suppliers owed by local and regional governments, 0.9 points to cover EU aid funds for Greece, Ireland and Portugal, and 0.9 points for the so-called electricity “tariff deficit” arising from a failure to charge consumers the full price of their supply, as well as other items.– (Copyright The Financial Times Limited 2012)