Spain pledges cuts to meet deficit target as bailout looms

Spanish Prime Minister Mariano Rajoy’s nine-month-old government announced its fifth austerity package in what may be a move to head off tougher conditions demanded as part of a potential European bailout.

Rajoy’s Cabinet approved a new tax on lottery winnings and a cut in ministries’ spending as part of a 13 billion-euro ($16.8 billion) central government package to shrink the euro area’s third-biggest budget deficit. The target for 2013, which includes the regions and social security, is 4.5 percent of economic output compared with a 6.3 percent goal for this year.

“It’s a major push for the reduction of the budget deficit,” Budget Minister Cristobal Montoro told reporters today in Madrid. “We are making a major shared effort.”

The measures reflect Rajoy’s attempt to balance the demands of his European Union counterparts with voters demonstrating on the streets of the capital. He’ll raid the pension reserve fund to boost payments for retirees while unveiling a parcel of 43 separate measures that Economy Minister Luis de Guindos said exceed everything the EU has demanded for increasing growth.

Recommendations

Spain’s plan “responds to country-specific recommendations and goes even beyond them in some areas,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an e-mail sent while the ministers were speaking.

A 1 percent increase in payments to retirees will increase the pensions bill 4.9 percent to 122 billion euros while interest payments on Spain’s mounting public debt will increase 34 percent to 38.6 billion euros. At the same time, Rajoy is chopping 40 billion euros from his ministries.

The budget consolidation may yet be undermined by the performance of the Spanish economy which the government expects to contract by 0.5 percent next year. Economists expect a decline of 1.3 percent according to the median of 21 forecasts in a Bloomberg survey.

“They’ve increased the taxes for next year and cut spending but they didn’t change the growth forecast,” said Ricardo Santos, an economist at BNP Paribas in London. “We think that’s optimistic.” Santos expects output to fall 1.8 percent.

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