By Jack Duffy

PARIS (MNI) – Spain will announce a tight 2013 budget on Thursday
along with key reforms demanded by Brussels, but markets remain wary the
measures will be enough for Madrid to meet its deficit targets.

The budget will cut spending at some ministries by as much as a
third, create an independent fiscal authority to oversee future tax and
spending policy, and impose new taxes on greenhouse gas emissions and
investment capital gains, according to Spanish media reports.

The measures are expected to reduce Spain’s central-state deficit
to 3.8% of GDP, which, when added to the 0.7% shortfall of the country’s
17 semi-autonomous regions, will allow Madrid to claim to meet its hit
its target for an overall deficit of 4.5% next year, the journal El
Confidencial reported.

“The Spanish government has a clear economic strategy,” Prime
Minister Mariano Rajoy said in a speech Wednesday to the Americas
Society in New York. “It also has parliamentary stability of more than
three years that will allow it to make the needed reforms,” he said.

The budget is expected to freeze the pay of public employees for a
third consecutive year, but a major question mark is whether Rajoy will
freeze the inflation-indexation of pensions, which is expected to cost
the Spanish government E6 billion this year.

Spending is expected to be cut by 4.2% at the Justice Ministry and
by 30% at the agriculture and culture ministries, media reports said.
The cuts are expected to be approved by the cabinet today and unveiled
at a press conference beginning at around 1200 GMT.

Although Rajoy had pledged to do what it takes to honor Spain’s
commitments, the country has a spotty record of hitting its deficit
targets and markets remain wary. Yields on 10-year Spanish bonds rose
above the 6% level again this week as Spanish share prices have plunged.

The daily El Pais reported Thursday that Spain might have to revise
its 2011 deficit up to 10% of GDP from 8.9% to include E11 billion it
has injected into its shaky banking system.

“We continue to think that (unless additional fiscal measures are
introduced), Spain will miss its budget deficit target for this year,”
Barclays Capital said in a research note Thursday. Larger-than-expected
shortfalls in regional finances could push Spain’s overall deficit to 7%
of GDP this year, above the 6.3% target, Barclays said.

The national economic reforms that Spain will release along with
its budget are expected to focus on longer-term issues related to
competitiveness, including pensions, measures to limit early retirement,
increasing competition in protected segments of the economy and
broadening labor market flexibility.

The reforms are expected to be accompanied by implementation
timetables, which would allow the plan to serve as a blueprint for a
memorandum of understanding, if and when Spain decides to request aid
from Europe’s bailout fund and from the European Central Bank.

–Paris newsroom, +33142715540;; jduffy@marketnews.com

[TOPICS: M$$CR$,M$X$$$,MGX$$$,M$S$$$,MT$$$$]