Spain budget imposes further austerity measures

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment.

Deputy Prime Minister Soraya Saenz de Santamaria called it "a crisis budget designed to exit the crisis".

The new programme of savings, tax rises and structural reforms will be overseen by an new budget authority.

Expectations are growing that Spain will seek a financial bailout from its eurozone partners.

On Friday, results of a stress test on Spain's banks are due to be released.

Revenue surprise

Among the key points presented were:

• a 12% average cut in ministerial spending

• a freeze in public sector pay for the third consecutive year

• a new independent authority to monitor government finances

• an increase in pensions funded by drawing on 3bn euros of reserves

• a new 20% tax on lottery wins above 2,500 euros (£2,000; $3,200)

• a new car scrappage scheme

Ms Saenz de Santamaria said that efforts to close the government's deficit would focus more on spending cuts than tax rises.

The only areas of spending to increase in 2013 would be pensions, student scholarships and interest payments.

Individual pension payments would increase by 1% next year, the government said, while the overall pension budget would rise by 4%.

Spending cuts would reduce the deficit by 0.77% of GDP in 2013, while revenue adjustments would yield 0.56%.

The government expects the deficit this year to come to 6.3% of GDP, although many analysts expect this target to be overshot.

However, the government said that tax revenues were proving to be higher than budgeted for this year, and were expected to increase by a further 3.8% in 2013.

The deputy prime minister also said that the government would introduce 43 new laws to reform the country's economy.

The reforms went further than what was required by Brussels, according to Economic Affairs Commissioner Olli Rehn.

"I particularly welcome the ambitious plans to establish an independent fiscal council, to further liberalise professional services, and to effectively reduce the fragmentation of the internal market in Spain," Mr Rehn said.

Market rebound

Meanwhile, Castile La Mancha has become the fifth of Spain's 17 regional governments to say that it will draw on a rescue fund set up by Madrid.

The central Spanish region said it would request 848m euros from the 18bn-euro Regional Liquidity Fund, joining Valencia, Murcia and Catalonia, who have collectively requested 3bn euros, and Andalucia, which has yet to specify how much it needs.

The Spanish stock exchange's Ibex index held steady on Thursday, ending the day down just 0.15%, having lost 3.9% the previous day.

Other European stock markets experienced modest rebounds of about 0.25%.

Stocks fell sharply on Wednesday, as markets were rattled by violent protests in Madrid and Athens, as well as a statement from the Spanish central bank that the country's economy had continued to shrink in the third quarter of the year.

However, the more optimistic sentiment was boosted on Thursday when the Greek finance minister, Yannis Stournaras, said that a "basic agreement" had been reached with lenders on the austerity measures required for the release of Greece's next tranche of bailout money.

On the bond markets, the Spanish government's long-term cost of borrowing fell slightly, to an implied interest rate of just under 6% for 10-year debt.

The 10-year rate had risen by a quarter percentage point on Wednesday, as lenders' fears over the government's ability to repay its debts, or stay within the euro, resurfaced.

The BBC's Tom Burridge, in Madrid, says that it seems investors are losing patience.

Spain will hope that Thursday's austerity measures will mean fewer economic conditions if it asks for a second bailout.

'Significant' fall

Prime Minister Mariano Rajoy fuelled expectations that Spain would ask for a bailout when he told the Wall Street Journal on Wednesday that if borrowing costs were "too high for too long", then "I can assure you 100% that I would ask for this bailout".

At the press conference to present the new budget, economy minister Luis de Guindos said the government was still analysing the conditions of the bailout, which would trigger purchases of Spanish government debt by the European Central Bank.

The economic situation remains grim, with comments from the central bank on Wednesday indicating that the country's recession deepened in the last three months.

"Available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial tension remained at very high levels," the Bank of Spain said in a monthly report.

Last week, Spain's second biggest bank, BBVA, estimated that up to another 60bn euros (£48bn; $78bn) will be needed to bail out the banking sector.

About 20bn euros has already been allocated to troubled banks.

Spain, the eurozone's fourth largest economy, fell back into recession in the last quarter of 2011, the second recession since the bursting of the country's property bubble.

But with a shrinking economy and unrest in the country, reducing the deficit via further austerity measures may prove a difficult task for the government.