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Belt-tightening

Spain dives deeper into austerity

Spanish government officials outlined a new austerity budget today, aimed at shaving some €40 billion—8.9% of the budget and 0.77% of GDP—in 2013. The announcement comes amid a deepening recession in Europe’s fourth largest economy, calls from protestors outside parliament for Prime Minister Mariano Rajoy’s resignation, and pressure for Spanish officials to request a full international bailout. The aggressive budget is an attempt by the Spaniards to set their own austerity terms rather than having Brussels dictate conditions for them.

Overall, the announcement was light on specifics. More details are due out tomorrow, followed by proposals for 43 new laws. Most significantly, Spanish officials have not so far made a formal request for aid from the European Union, International Monetary Fund (IMF), and the European Central Bank (ECB)—the “troika”—as some investors had hoped. (The ECB has offered to buy short-dated government bonds from countries making aid requests in an attempt to lower their borrowing costs and encourage continued access to financial markets.) Spanish officials said they were still looking into the terms of the program, but it’s also likely they’re waiting for details from an independent review of their banking sector, due out tomorrow.

Highlights from today’s announcement:

  • The government will tap up to €3 billion from social security reserve funds to cover liquidity needs.
  • The new budget will include more spending cuts than tax hikes.
  • No pension cuts.
  • 63% of the budget will go to social spending.
  • Unemployment should remain around 24.3% in 2013.
  • A new independent budget authority will monitor deficit reduction and government spending.
  • A plan to liberalize energy and telecom markets.
  • GDP expected to fall to 1.5% for 2012; and 0.5% in 2013.
  • A freeze on public sector wages for a third year.
  • A 12.2% cut to ministerial budgets; 15% to public sector investment budgets.
  • Tax revenue will exceed targets this year.
  • Eliminate tax deductions for home purchases.

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