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 .


Comments 5 of 103



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