Deep in Debt, Spain Cuts Spending by $70 Billion
By ANDRÉS CALA and MATTHEW SALTMARSH
MADRID — The Spanish government outlined far-reaching spending cuts on Friday to bring its sizable budget deficit under control, amid forecasts that the country would remain mired in recession for another year.
Broader data released Friday showed the economic recovery in the 15 other countries using the euro would remain sluggish.
Spain has been hit especially hard by a slump in home prices, and is scrambling to avoid the fate of Greece, where a ballooning budget deficit has raised concerns about the government defaulting on its bonds.
The Spanish government said on Friday that it would cut spending by almost 50 billion euros, or $70 billion, to help bring its budget deficit down to 3 percent of gross domestic product by 2013, from 11.4 percent last year. Lowering the deficit to 3 percent would be in line with European Union’s limit on national deficits.
Elena Salgado, the finance minister, said the spending cuts would spare only a few areas — education, antiterrorism, research and development, pension payments and unemployment assistance.
Total spending cuts for public employees will amount to a reduction equivalent to 0.3 percent of G.D.P. through 2013, taking into account reduction measures like hiring freezes. A small wage increase for public employees was negotiated recently.
With its traditional union allies voicing opposition to most of the proposals, the Socialist government is very likely to face strong opposition to the spending cuts. The government has already announced tax increases.
“It is a rigorous plan which we are convinced will allow us to meet our commitments by 2013,” said the deputy prime minister, María Teresa Fernández de la Vega, referring to the deficit. .
The government left unchanged its forecast for 2010 of a 0.3 percent contraction. The International Monetary Fund said this week that it expected Spain to be the only country in the euro zone to remain in recession this year. It forecast a contraction of 0.6 percent in 2010, then growth of 0.9 percent in 2011.
The national statistics office in Madrid said Friday that unemployment was 18.8 percent in the fourth quarter, up from 17.9 percent in the previous period. According to Eurostat, the European Union’s statistics agency, 44.5 percent of people under 25 in Spain were without work at the end of 2009.
“This quarter we could see further job loss,” Ms. Salgado warned.
Until the crisis hit, Spain had experienced a decade of robust expansion and was praised as a European success story, its economy fueled by easy credit and an explosion in home construction.
Financial markets have been focusing on the weak finances of the euro zone’s Mediterranean members: Greece, Italy, Portugal and Spain. The price of Greek bonds in particular has been sliding as investors lose faith in the ability of the Greek government to service its debt.
While Greece represents about 2.5 percent of euro zone G.D.P., Spain accounts for about 11.5 percent.
“If Greece goes under, that’s a problem for the euro zone,” Nouriel Roubini, a New York University professor, said at the World Economic Forum at Davos, Switzerland, according to Bloomberg News. “If Spain goes under, it’s a disaster.”
Separately, the Spanish government proposed gradually increasing the minimum retirement age by two years, to 67, starting in 2013, a process that would be phased in over a decade. The measure has yet to be approved by a cross-party commission; even if it is agreed to by Parliament, it would not affect current retirees, said Ms. Salgado, the finance minister.
Other data released Friday by Eurostat showed that inflation edged higher in much of the Continent in January, although less than had been expected. Unemployment continued its slow climb.
Analysts said the reports suggested a continuation of the muted recovery in the region throughout the year.
“All in all, the euro zone is now approaching Goldilocks territory,” where activity is deemed neither too hot nor too cold, said Peter Vanden Houte, an analyst at ING. Growth should be “picking up gradually, while underlying inflationary pressures remain subdued.”
Consumer prices in the euro zone rose 1 percent in January from a year earlier, Eurostat said in a preliminary release. Economists had expected a 1.2 percent increase. In December, inflation was 0.9 percent higher. That was still well behind the nearly 3 percent rate in Britain and the United States.
Marco Valli, an economist at UniCredit Research in Milan, said the lower rate in the euro zone partly reflected the strength of the euro against the pound and dollar.
Economists said the smaller increase in the euro zone appeared largely a result of energy prices, which, though softer in recent weeks, remained well above levels of a year ago. The estimate did not contain a monthly comparison or a detailed breakdown, which will be published Feb. 26.
Inflationary pressure in the coming months could increase, analysts said, from higher energy prices and possibly from rising food costs. That effect is likely to be offset, however, by subdued pressure for higher wages and rising unemployment.
Eurostat said the euro zone jobless rate was 10 percent in December, up slightly from 9.9 percent in November.
The November figure had been revised down from an initial estimate of 10 percent. Analysts polled by Reuters had forecast a figure in December of 10.1 percent.
The statistics office said the number of people without jobs rose to 15.8 million in the euro zone, rising by 87,000 in December over November’s figure.
Andrés Cala reported from Madrid and Matthew Saltmarsh from Paris. |
