Spain 2011 budget to stick with austerity push

 

Spain will deliver its toughest budget in 15 years from Friday as it attempts to reassure markets it can meet hard deficit cutting targets even as its economy struggles.

An outline of the budget will be presented at a regular weekly government press conference on Friday, with the bulk of the measures, including plans for debt issuance in 2011 to be outlined next week before Parliament. No date has been set.

Spain is dealing with the fallout from an 18-month recession which started in 2008 after a debt fuelled economic and construction boom collapsed. Unemployment soared to over 20 percent and borrowing spiralled, forcing the government to make severe cuts and reforms to try and stimulate a broken economy.

The budget is seen as key for Jose Luis Rodriguez Zapatero's Socialist administration. If budget support is not achieved by the end of year deadline a no-confidence vote could be called and bring forward elections which he would likely lose according to polls.

However, while his popularity is low, the government, which has a parliamentary minority, is said to be close to a deal with the Basque National Party (PNV) to help squeeze it through, in return for some concessions for more autonomy in the region.

Investors will also closely eye the budget to make sure it does not sway from Spain's promise to slash its deficit to 6 percent in 2011, on its way to an EU-guideline of 3 percent by 2013. The final budget must be signed off after changes by the end of the year, coming after a general strike on Sept. 29 to protest against austerity measures.

Spain's reputation on financial markets improved compared with fellow weak economies Ireland and Portugal during August and September as the country's austerity measures gained credibility and concerns about the health of its banks eased.

"Markets will be fine if Zapatero does not slow the proposed pace of fiscal consolidation, and confirms the government's determination to lower the public sector budget deficit" said Raj Badiani, economist at IHS Global Insight.

However, he warned that several risks hung over Spain, including the possibility it could fall back into recession this year, autonomous regions don't meet their debt cutting obligations, and the fact borrowing costs still remained high for issuing its debt.

Spain will need to pass an austere budget and hope that its forecasts for the economy to grow by 1.3 percent next year defy more pessimistic predictions by economists and the International Monetary Fund that could hit deficit targets.

RIGHT DIRECTION

Small changes to a previously planned 6.4 billion euros cuts to infrastructure spending spooked investors last month, at a time when investors have favoured Spain over perceived weaker fellow countries on the fringes of the euro zone struggling to control their deficits.

The budget will cut public spending by 7.7 percent to 122 billion euros from 132 billion euros this year. Government departments will also be forced to slash costs by around 15 percent, while civil servants wages are to be trimmed by 5 percent, and pensions frozen.

No major new details are expected on Friday, but a tax hike on the wealthy is likely. Reports on Wednesday suggested higher taxes for those earning more 120,000 euros, but this would add little to government coffers.

Friday's details will not be accompanied by new macroeconomic forecasts as the government says its recently updated ones are still intact. However, new deficit projections could be revealed.

Details of the government's bond issuance for next year will likely emerge in next week's full presentation of the budget.

This year the Treasury planned to issue 97 billion euros in long-term debt.

Spain's borrowing costs fell in August and September after spiking higher over the summer as investors feared that weaker euro zone countries could face the same fate as Greece.

Largely successful bank stress tests at the end of July as well as concerted austerity measures have eased the pressure, even if Zapatero continues roadshows in New York this week to convince investors of the country's solvency. So far it seems to be working, with data showing the central government budget deficit almost halved in the first seven months of the year helping economists agree that Spain may get the job done in contrast to other struggling countries.