27 September 2012

FT: Spain crafts crisis budget with fresh cuts

The Spanish government has announced its fifth round of budget cuts and tax increases in just nine months, as part of a reform package that could pave the way for an EU bailout and sovereign debt purchases by the European Central Bank.

Luis de Guindos, finance minister, said his government still did not know what conditions the EU might impose in return for a bailout, which the ECB has set as a precondition for buying Spanish debt in order to lower borrowing costs for Europe’s fourth-largest economy.

Officials said the close coordination between Spanish and EU authorities was part of a carefully-calibrated strategy to meet the conditions likely to be demanded by eurozone lenders if Mariano Rajoy, Spanish prime minister, is forced to request a European bailout.

Under Madrid’s revised budget plans, government spending will be slashed by 8.9 per cent. Next year’s tax receipts are forecast to rise from €170 billion to €175 billion, helped in part by an increase in sales tax. Alongside the spending cuts, the government said it would pass 43 new laws over the next six months and establish a new independent budgetary authority to monitor government spending.

Spain is racing to meet a budget deficit reduction target of 4.5 per cent of economic output for next year, compared to almost 9 per cent last year. Figures released earlier this week signalled the government had slipped behind the 2012 target it agreed with Brussels.

Berlin has been pressing Mr Rajoy to delay any request for assistance, wary of its ability to gain support within the Bundestag for more bailout aid and unconvinced whether bond-buying by the eurozone’s €500 billion bailout fund – backed by the European Central Bank’s new bond purchase programme – is needed.

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