Spain budget: Cutting back for growth tomorrow

Anti-austerity protesters in Madrid, 25 September Madrid has seen two days of sustained protests against the cuts

The Spanish budget for 2013 will be unveiled later today. It promises to be tough. There is speculation of a freeze in pensions and public sector pay, a clamp-down on early retirement and a cut in spending on infrastructure. Increased taxes for home owners and the privatisation of the railways may also be on the menu.

The Spanish people may feel a little battered by all the news. It was only two months that savings of 65bn (£52bn; $84bn) - spread over two years - were announced.

All of these cuts are aimed at reducing the Spanish deficit to 6.3% this year, as demanded by the European Commission.

Whatever savings are announced today that target will almost certainly be missed. The inconvenient truth is that the economy is not just in recession but it is contracting sharply. Unemployment is the highest in Europe and rising. Exports are up but some see an economy trapped in a downward cycle. Further cuts, it is argued, will only choke the economy further.

There is, however, a back plot to this budget. The government is desperate to avoid having to apply for a full bailout, particularly if tough conditions are attached, dictated by the so-called "men in black" - the IMF.

Part of the government's strategy is that if it has to ask for a bailout, it wants to be able to claim it has voluntarily adopted the tough measures and so no more are needed.

Patience running out

Spanish Prime Minister Mariano Rajoy says that he wants to know what the conditions are before deciding on a bailout. However he has said he will request a rescue if Spain's borrowing costs stay too high for too long. Yesterday they had edged back above 6% and into dangerous territory.

The French and the Italians want Madrid to apply for a rescue. It would reduce uncertainty, they argue, and ease market pressure generally.

The Germans are less keen. They are wary of once again going to the German parliament and asking Germans to take on further liabilities.

The financial markets are nervous. With Spain, they see a fast-shrinking economy and a key region, Catalonia, using the crisis to push for more independence. They see house prices still falling and bad loans rising and regions needing financial support.

On Friday, the government will receive the latest results of an audit of its banks. That will determine how much it needs to draw on the 100bn euros set aside in July for a bailout of the banks.

The Spanish puzzle illustrates a deeper problem for the eurozone. The crisis will only subside through growth. Austerity is choking demand in many countries.

Both Spain and Italy are working on freeing up their labour markets, which will boost growth, but such measures take time and patience is wearing thin.

Increasingly, young people are realising that in a monetary union there is not the option of devaluation to make their economies competitive. In its place is internal devaluation where wages and pensions are cut over years. That is fuelling protests in Spain and the streets may yet have their say in this crisis.

Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 23.

    Some BBC editors (not Hewitt) have gone as far as to suggest that Spain is a fundamentally corrupt country. That is over the top. An article entitled "Spanish views on the recession" includes the view of a British ex-path who claims that bribes and corruption are rife in Spain. That comes from someone who earns his living from trading with Gibraltar(a tax haven) and from playing poker(!).

  • rate this

    Comment number 22.

    6. Dailymailreader
    ''Spain needs to leave the Euro, devalue and become competitive again.''

    For Spain this might work as still it has some production going on. For Greece not. However Greece is a country whose production has been killed in the 1980 - 1995 period of EEC/EU membership. On top - and even more serious - the country faces external geomilitary threats. It is the perfect EU hostage.

  • rate this

    Comment number 21.

    I can see Spain going somewhere near where Greece is going with all this Austerity measures.
    They will sell off everything including their sovereign state to save the Euro and who gets all this wealth?
    If their Governments are really representing their People they would not sell everything off to the highest bidder for the love of a currency!
    As we can see Governments don't represent the people

  • rate this

    Comment number 20.

    21st century Europe where we can build the large Hedron collider but responsible mothers can not feed their daughters.

    If we can do the former WE MUST be able to do the latter.

    The ONLY reason we can not is because of greed and political cronyism.

    I hope Spain does have a revolution and I hope it leads to a broader cleansing of our filth ridden corridors of power.

    Vive la revolution!!!

  • rate this

    Comment number 19.

    So the fact that Rajoy says we will do the job of toughening up austerity to avoid the EZ being even tougher suggests to me that some of the measures are a form of punishment for getting into this position. As is now evidenced it is these measures that will disable the the Spanish economy in creating the revenues and avoiding collateral expenditure such as welfare payments.

  • rate this

    Comment number 18.

    It appears that the Spanish have missed the irony of the situation. Catalonia baulks at subsidising poorer regions and, yet, it is assumed that the richer countries will subsidise Spain!

  • rate this

    Comment number 17.

    Capitalism and investor's greed have allowed Germany to inflict
    misery on Greece and other victims in the EU. A bail-out by any Bank
    at exorbitant interest rates will only make matters worse. The only logical
    thing is for Greece, Spain et al to leave the EU.

  • rate this

    Comment number 16.

    The BBC coverage of the Spanish crisis is biased to distract UK public from their all too similar domestic problems. It gives the illusion that Spain's troubles are not only much worse but also that they are caused by the euro. Cuts and protests in Spain are nothing that hasn't occurred in the UK already. In Europe we're all headed to the same bottomless pit if we go on with this austerity folly.

  • rate this

    Comment number 15.

    Chris London -
    I do not disagree with your post my problem is trying to understand where the money will come from.
    The world economy is worth 50 to 60 trillion
    The World Government debt is worth 49 trillion

    add to this private debt and shadow banking debt and one has to conclude there is no capitol left with which to balance the books

  • rate this

    Comment number 14.

    Britain and Spain suffer from the same malady: past governments encouraged corporate and private greed. They didn’t undertake fundamental reforms when the going was good. Other nations did, such as Germany and Sweden. Political cowardice led us to this, not the Euro.

  • rate this

    Comment number 13.

    @11 stev.
    I made no reference to you, your comment or your figures.:-)

  • Comment number 12.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 11.

    Peepsaltea - I live in Spain and can assure you my figures are correct. I am guessing you neither have a business to run or a job to keep. The only area of growth Spain is seeing is it's black economy, is that what you are talking about??

  • Comment number 10.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 9.

    All just part of the plot to subject Europe to such chaos and suffering that it would sooner accept Brussels dictatorial rule, which appears to promise a return to stability and order, rather than the everyday struggle the EU and it's single currency, has in fact, created!
    Read your history books and discover how well this devious enslavement of nations worked in the past!

  • rate this

    Comment number 8.

    We live in Spain and have a much better understanding of this society than most commentators on here although by no means experts.

    Watching both politicians and ordinary people dealing with the crisis here is most encouraging - this is NOT Greece & neither is the mentality. They are taking their responsibilities head on, tough actions & cuts.

  • rate this

    Comment number 7.

    Please do not get caught up with terminology. What governments are having to do now is balance the books, something they should have been doing all along. However they thought that the bubble was never going to burst and that they could live off the never never. Unfortunatley that was never going to be the case. And we the fools that we are who bought the dream and now we have to pay for it.

  • rate this

    Comment number 6.

    You only have to look at where this policy has led in Greece to see how pointless endless austerity is. Spain needs to leave the Euro, devalue and become competitive again.
    Turning Spain into a third world country to keep the Eurodream alive, will the Spanish public agree?

  • rate this

    Comment number 5.

    2. stev
    4. uptoeleven

    That reflects the problem of Greece. Greeks up to the 80s were not a nation of public sector/large trusts employees like most other EEC countries but were, for the most, self-sustained people.
    Entry to the EEC brought EEC-based policies to kill the capacity of citizens to form businesses through - passed by a party precisely voted in 1981 to get the country out!
    Get it?

  • rate this

    Comment number 4.

    @2 - Stev - you'd also have to keep £3,000 in the bank as a bond and pay £254 / month in national insurance from the day you opened, profit or not. This place is not set up for business, needs root and branch reform. Daft thing is, the man (or woman) on the street is not that lazy, they want to work, they want to set up businesses, austerity and bureaucracy prevent them.


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