–Cuts Spending By E40 Billion Next Year
–Adds Quotes And Additional Detail To Initial Story

MADRID (MNI) – The Spanish government said Thursday that its budget
for 2013 was based on the assumption that it is facing a “soft
recession” and that it will be able to meet its deficit targets.

Addressing a press conference after the cabinet adopted the draft
2013 budget, Cristobal Montoro, the finance minister, said that the
economy was expected to contract by only 0.5% next year – a smaller
decline than many private economists had forecast.

“For 2013, we foresee a soft economic recession, which we hope will
be the last one in our country,” Montoro said.

Overall, Spain’s 2013 budget will cut ministerial spending by an
average of 8.9%, Montoro said, and total spending will be reduced by
about E40 billion. Tax revenues meanwhile, are expected to rise by 3.8%
to E175.2 billion.

“This is a budget in a time of crisis, but one to help us get out
of the crisis,” Spain’s deputy prime minster Soraya Saenz de Santamaria
told reporters.

Montoro insisted that Spain will be able to meet it deficit targets
of 6.3% this year and 4.5% in 2013, even though it is facing a sharp
increase in debt service costs. Debt costs will rise by E10 billion next
year to E38.6 billion, an increase of 34%. The finance minister said the
country’s debt ratio was projected to be 75.9% of GDP this year and rise
to above 80% in 2013.

Montoro emphasized that 63% of the budget will still be devoted to
“social spending” such as pensions and financial aid for education. “The
adjustment will not be done at the expense of social protection,”
Montoro said. He added that the fiscal ax would also spare spending on
research and development.

However, unemployment benefits will be “contained,” Montoro said,
even though the government is projecting only a miniscule drop in the
unemployment rate, from 24.6% this year to 24.3% in 2013.

New homeowners will also feel the pinch, since the budget proposes
to eliminate the tax deductibility of home purchases. It also limits
amortization for tax purposes by large companies. And lottery winnings
will be taxed at a higher rate of 20%.

The government also confirmed today that it will create a new
fiscal watchdog to monitor the budgets not only of the central
government in Madrid but of regional and municipal ones as well, in
order to ensure the country’s overall public deficit targets – 6.3% this
year, 4.5% in 2013 and 2.8% in 2014 – are met.

Priority will be given to compliance with the EU’s fiscal rules,
which limit national deficits to 3% of GDP or less and, with the new
“fiscal compact” will ultimately require that red ink be limited to no
more than 0.5% of GDP, the ministers said.

Economy Minister Luis de Guindos said that Spain was still
considering its options under the European Central Bank’s OMT bond
buying plan and that it has made no decision on whether to ask for an EU
aid package, which is the pre-requisite for requesting assistance from
the ECB.

He emphasized that the structural reform plan announced today was
designed in close cooperation with the European Commission, suggesting
that the plan could eventually serve as a springboard for an official
aid request.

The planned reforms, discussed only in very general terms, include
liberalization of the labor market, of professional services and the
energy and telecommunications sectors. The government also plans to
create a new agency to foment exports.

Olli Rehn, the Commission vice president in charge of economic and
monetary affairs, said in a statement that the reform plan contained
“concrete, ambitious and well-focused measures” that even went beyond
the Commission recommendations in some areas.

While making deep cuts, Prime Minister Mariano Rajoy did not
announce plans to freeze the indexing of pensions, as some economists
suggested he might. Pensions will rise 1% in real terms and 4% in
nominal terms next year.

Montoro confirmed that an E18 billion “liquidity fund” set up by
the central government to help Spain’s indebted autonomous regions is
now operational. He said the first beneficiary would be Catalonia, the
economic powerhouse which has fallen into debt and has requested a E5
billion bridge loan.

The decision to put Catalonia at the front of the line might have a
political component to it: the region, having failed to secure more
fiscal autonomy from Madrid, is now threatening secession from Spain,
which could lead to a full-blown constitutional crisis.

–Paris newsroom, +331-42-71-55-40.

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