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Spain unveils austerity plan

Source: Financial Times - Sat 30th Jan 2010

Spain's Socialist government on Friday admitted a larger-than-expected budget deficit for 2009 and unveiled a hastily produced plan to narrow its deficits by €50bn over the next four years.

Like the smaller economies of Greece, Portugal and Ireland, Spain is trying to shore up its credibility on international markets. A surge in sovereign bond yields this week showed investors were concerned about loose fiscal policies and the cohesiveness of the eurozone.

Elena Salgado, finance minister, said the aim was to cut the deficit from a higher-than-predicted 11.4 % of gross domestic product in 2009 to 3 % in 2013, in line with Spain's promises to meet European Union budget rules.

As recently as 2007, the Spanish budget was in surplus by 1.9 % of GDP, but the global economic crisis and emergency state spending measures to save jobs have led to one of the most pronounced reversals in budgetary history.

María Teresa Fernández de la Vega, Spain's senior deputy prime minister, called the measures "a rigorous plan, with which we are convinced we'll reach 2013 having done our homework".

>The government also increased the retirement age from 65 to 67, a measure that will be introduced gradually from 2013 to help maintain the reserves of the social security system as the population ages.

MMs Salgado said nearly a third of the 8.4 percentage points of deficit reduction required by 2013 would come from a cyclical return to economic growth and the withdrawal of temporary fiscal stimulus measures.

Of the remainder, 1.1 percentage points is to be derived from higher taxes and a drive against tax evaders, and only 4.1 percentage points from reduced spending, including a near-freeze on hiring for the civil service this year.

Even after the announcement doubts remain about Spain's ability to control its budget spending, however, particularly since a fifth of the proposed adjustment is supposed to come from the autonomous regions and local authorities that account for more than half of spending.

The central government, furthermore, specifically ruled out cuts in social security payments, education spending, research and development or foreign aid.

"The main cause of the increased deficit is not increased costs, it's the fall in revenues," said Alfredo Pastor, economics professor at Iese Business School. "If you can't cut social security or touch the spending of the autonomous regions or municipalities, I don't see where you can get it from," he said. "We have a credibility problem."

Spain's austerity plan – announced the same day that figures showed 18.8 per cent of the workforce was unemployed in the last quarter of 2009 – assumes a return to robust annual economic growth from 2011. "The risks are clearly on the downside," Ben May, European economist at Capital Economics, commented in a research note.

Having been late to acknowledge the severity of the economic crisis and its fiscal effects, Spain is now trying to make up for lost time. "We will fulfil our promises," José Luis Rodríguez Zapatero, Spanish prime minister, said at the World Economic Forum in Davos this week. He added that Spain was one of the few countries that had not had to rescue its banks.

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