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 Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 103.

    98 Haimek

    "There is no doubt that Greece , Italy , Spain , Portugal , Ireland need to leave the Euro the Euro should be systematically ended ."

    Are you saying that these countries are so inferior that they are not fit to be included in a thriving northern Europe? I thought they would have appreciated being helped and done their best to keep up. Currencies don't make people reckless.

  • rate this

    Comment number 102.

    #101 JeffM

    -- This appears to be a good analysis of Spain ?

  • rate this

    Comment number 101.

    ...people seem to fail to realise that there really is NO WELFARE STATE in Spain.......99% of the youth unemployed recieve absolutely nothing from the state - their family keeps them off the they have not workrd the minimum 2 years - and contributed - and strictly speaking they are not even able to claim free health care

  • rate this

    Comment number 100.

    I run 3 businesses in Spain and there are more than sufficient people willing to work for 7€/ cant see why more labour reforms would be required. Problem is the Spanish economy is based upon services and tourism - not manufacturing. so lowering wages is only destroying the service sector - we really have nothing more to export - china destroyed what little industry we had

  • rate this

    Comment number 99.

    If 17 nations were not tied together with one currency , none of the irregularities , tax collecting , corruption , of individual countries would matter . Countries could not have afforded to borrow to improve infrastructure and standards of living . The Euro with single interest rate has so inbalanced economies , making it impossible for weaker economies to compete .

  • rate this

    Comment number 98.

    #17 Pamela Read
    It is a combination of factors that have brought the western world ,Europe to this dire situation . I don't know whether government need to borrow , gave freedon to finantial institutions to exercise excessive greed or vice versa . There is no doubt that Greece , Italy , Spain , Portugal , Ireland need to leave the Euro . Better still the Euro should be systematically ended .

  • rate this

    Comment number 97.

    "We issue our own currency they don't, not only that but WE ISSUE OUR OWN CURRENCY THEY DONT"
    I am not sure that I can differentiate between the two?

    no difference other than the capitals but its so fundamental & important that it deserves to be said twice & shouted.
    nowdays every macro economics problem has to be solved twice, once for the EZ & once for normal currencies

  • rate this

    Comment number 96.

    94 Jaker
    "World debt this moment is in trillions £49,945,859,656,428,319 "

    Money has always been simply a record of whom owes what to who. All you are really quoting is how much money there is in the world - who cares? As this money is repaid, the creditor then spends it into the economy generating growth and employment.

  • rate this

    Comment number 95.

    75 oaktree
    "--Those are Greek statistics --made by Greeks for the world to see."

    What about the German statistics --made by the Germans -- which shows them working shorter hours than most of Europe.

    Besides, do you have alternative statistics to quote? or are you just guessing (and therefore wasting everyone time)?

  • rate this

    Comment number 94.

    World debt this moment is in trillions £49,945,859,656,428,319 & the Super rich have approx 24trillion stashed away in tax free havens right this minute evading/avoiding tax. See what I'm saying?

    Growth tomorrow? That's going to be one hell of a long day & in that long day, Spain or Greece might with all the mayhem & protests so far & on the way allow a new Dictator to pounce. Beware!

  • rate this

    Comment number 93.

    74 margaret
    75 quietoaktree
    Re: Greeks working much longer hours than Germans
    "Yes I saw that. But it isn't the longer hours that do the trick but what you do in them."

    But that's not what you said, you said Germans work longer hours than the Greeks despite the evidence:

  • rate this

    Comment number 92.

    Good thing Europe by-and-large disarmed its' population decades ago, or these corrupt bankers and their pet politicians might be in trouble. The 2nd amendent: from my cold dead hands.

  • rate this

    Comment number 91.

    #88 kane

    " You are twisted´

    --and you have never been ´straightened out´

    #89 mdvr37

    "Trade does not collapse if the Euro disappears."

    -- but maybe Greece if they return to a living standard below that of Bulgaria and Romania -- where the true capacity of their economy will put them.

    --Spain has a strong industrial base --for them the Euro is important.

  • rate this

    Comment number 90.

    #86 mdvr37

    -- " Stop listening to financial markets."

    --and failed parasitic societies and states?

    --there is no such thing as a ´free lunch´--even without financial markets.

  • rate this

    Comment number 89.

    The Euro turned out worse than I thought it would 10 years ago, and still I am in a minority who sees how bad an idea the Euro is.

    Take Greece and Spain, they still want to cling to the Euro, despite that it is obvious that the Euro is their main problem.

    They need to exit to be better off. Don't listen to bankers or Europhile scaremongering. Trade does not collapse if the Euro disappears.

  • rate this

    Comment number 88.

    4 Minutes ago

    #85 kane
    "--try saying that stupid comment to an Irishman !"
    You know an Irishman that's happy to be in the EU?

    "--a thick lip (or worse) may be his reply."
    THAT is a stupid comment. To suggest that an Irishman(of which I'm familiar with many),would stoop to violence over a comment as such, shows just how quick you are to stereotype. You are twisted.

  • rate this

    Comment number 87.

    #85 kane

    "With friends like the E.U, who needs enemies?"

    --try saying that stupid comment to an Irishman !

    --a thick lip (or worse) may be his reply.

  • rate this

    Comment number 86.

    (continued) The western world is right out of real GDP growth anyway, for the reasons I mentioned before. And in fact, when you factor out inflation and government overspending the western world hasn't had any real growth in a decade.

    Time to face reality, the western world has bankrupted itself. Focus on helping people instead of banks and wealthy investors. Stop listening to financial markets.

  • rate this

    Comment number 85.

    4 Hours ago
    "We issue our own currency they don't, not only that but WE ISSUE OUR OWN CURRENCY THEY DONT"
    I am not sure that I can differentiate between the two?

    1 Hour ago
    "-- that is why the EU helps them so much."
    With friends like the E.U, who needs enemies?

  • rate this

    Comment number 84.

    #82 CN

    They were ´3rd world´ before the EEC and EU --receiving ´development aid´

    -the Euro (with many ´free gifts`) --gave them the opportunity to get their massive inflations and constant currency devaluation under control --that caused their poverty.

    -this mess is their own making (banks are another problem) but now they are dragging down everybody --even Germany,

    --the Golden Goose.


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