Spain prepares for more painful austerity

MADRID (Reuters) - Spain will announce another round of unpopular austerity measures in a 2013 budget on Thursday, already prompting protests from a public battered by attempts to put the country's finances in order.

With this year's budget deficit target looking untenable, the conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions, "green taxes" on emissions or eliminating tax breaks.

The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. It must persuade Spain's European partners that it can cut the budget shortfall by more than 60 billion euros by 2014.

Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

Spain is at the centre of the euro zone debt crisis on concerns the government can't control its finances and those of highly-indebted regions, bitten by a second recession since 2009 which has put one in four workers out of a job and pushed up borrowing costs.

Protests against the cuts are gaining pace. More than 1,000 police barricaded Parliament in Madrid on Tuesday against protesters who planned to form a human chain around the building later in the evening.

Hundreds of demonstrators gathered in different points of the capital before marching to Parliament, saying they were angry that the state has poured public funds into crumbled banks while it is cutting social benefits.

"We're protesting against the cuts. I've had to give up my apartment," said Ondina, a 30-year-old fine arts graduate who is without a job. She said she can't survive on an unemployment benefit of 260 euros ($340) a month.

On the regional front, Catalonia, which generates about 20 percent of the national output, announced on Tuesday it would hold early elections on November 25 after its call for more tax autonomy was rejected last week by Rajoy.

Mounting political uncertainty in cashstrapped Catalonia, along with an announcement from southern region Andalucia that it was mulling seeking a 4.9 billion euros credit line from the central government, will pile more pressure on Madrid to seek European aid.

Rajoy is holding back from applying for help, which would activate a European Central Bank bond-buying program and bring down Spain's punishing debt premiums.

With the threat of the plan alone reducing 10-year yields by around 2 percentage points, the cautious leader, known for keeping his cards close to his chest, is playing for time.

Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections October 21, pushed short-term yields higher at auction on Tuesday.

The government is also expected to set a fresh timetable for economic reforms, on Thursday or Friday, seen as an attempt to pre-empt strict EU-imposed conditions for aid, and help the conservatives save face at home.

RUNNING OUT OF OPTIONS

Half-year deficit data indicate national accounts are already on a slippery slope that will drive Spain into a bailout.

The deficit to end-June stands at over 4.3 percent of gross domestic product, including transfers to bailed out banks, making meeting the 6.3 percent target by the end of the year almost impossible.

On Tuesday, the treasury ministry said the central government deficit to end-August had reached 4.77 percent of GDP, already above its year-end target of 4.5 percent of GDP.

"Its going to be difficult keeping the deficit to around 2 percent in the second half, when the first half was closer to 4 percent, especially since traditionally, the second half deficit is higher than the first," said Juan Ignacio Conde-Ruiz, economist at Madrid's Complutense University.

For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1 percentage points implying further saving needs of up to 10 billion euros for this year alone.

Rajoy has been careful to highlight the importance of next year's deficit target of 4.5 percent of GDP though any shortfall this year will have to be carried through and will weigh on 2013's accounts.

After slashing civil servants' wages, raising value added tax by 3 percentage points - the main VAT has gone from 16 percent to 21 percent since 2010 - and cutting health and education spending, Rajoy is running out of options.

More than 60 percent of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people.

Sources say the conservatives are studying eliminating, or at least limiting, the inflation-linked raise in pensions, which account for around a quarter of all spending.

On Tuesday Deputy Prime Minister Soraya Saenz de Santamaria repeated Rajoy's pledge that the government would make changes to the pension system only as a last resort, despite recommendations by Brussels.

Under current rules the government must raise pensions in line with inflation in November, but Rajoy has been underdone by his own austerity measures as the VAT hike is seen pushing prices up by more than 3 percent.

This VAT effect on consumer prices will cost the government an extra 3.5 billion euros in pensions costs, Conde-Ruiz says, wiping out the 2.5 billion euros it hopes to raise this year by increasing the sales tax.

Further snips to public servants' wages, which have seen purchasing power fall by over 25 percent due to cuts by the former Socialist government and Rajoy, could fuel protests.

Other potentials savings include deeper cuts to the ministries, taxes on stock market transactions and so-called "green taxes" on greenhouse emissions, but in they themselves aren't enough to cover the potential shortfall.

However, a selective reduction of tax breaks could raise as much as 6 billion euros, according to economists.

"A massive pruning of these incentives could easily bring Spain another six billion euros," said Juan Jose Rubio Guerrero, president of the Independent Forum of Fiscal Analysts. (0.7743 euros)

(Additional reporting by Iciar Reinlein; Editing by Fiona Ortiz/Jeremy Gaunt)

Source: http://news.yahoo.com/spain-gears-more-painful-austerity-133434372--business.html

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