June 24 (Bloomberg) -- Spain’s Cabinet approved a 3.8 percent reduction in central-government spending next year as the first step in drafting a budget that the minority Socialist administration may struggle to push through Parliament.
Finance Minister Elena Salgado set a spending limit of 117.4 billion euros ($167 billion) for 2012, when she expects the economy to grow 2.3 percent, she said after a Cabinet meeting today in Madrid. The government “rules out” raising taxes in next year’s budget, she told reporters.
“There are still very important efforts to make in 2012 but in better conditions than in 2011,” Salgado said.
Prime Minister Jose Luis Rodriguez Zapatero, who doesn’t plan to seek re-election next year, is facing growing political and popular opposition to his efforts to rein in the euro area’s third-largest budget deficit. His austerity plans have partially shielded Spain from the worst of the fallout of the sovereign- debt crisis that has prompted Greece, Ireland and Portugal to seek bailouts.
Spain’s deepest budget cuts in at least three decades, as well as measures to raise the retirement age and reduce firing costs, have prompted protests throughout the country and failed to stem the increase in government borrowing costs. The yield premium investors demand to hold Spanish 10-year bonds over comparable German debt rose to 285 basis points today, approaching its Nov. 30 high of 298 basis points.
Zapatero will need support from smaller parties to pass his budget. A draft of the plan is scheduled to be presented in September before final approval by the end of December. If the plan fails to win the backing of parliament, the 2011 budget can be rolled over for another year. Deputy Prime Minister Alfredo Perez Rubalcaba, who is also the Socialists’ candidate for prime minister in the general elections due in March, said today he expects lawmakers to give their support.
Last year, the government secured a majority through deals with two regional parties, Coalicion Canaria, a party with two seats representing the Canary Islands, and the Basque Nationalist Party from the northern region. This week, the government won approval for a wage-bargaining law that the Bank of Spain and the International Monetary Fund have said is crucial for the economy’s recovery only by convincing Catalan and Basque regional parties to abstain.
Zapatero has repeatedly said he aims to complete his second four-year term to finish a series of legislative overhauls including changes to labor and pension rules. The government has rejected calls from the opposition People’s Party to call elections before the March 2012 deadline after the PP handed the Socialists their worst local-election defeat in three decades on May 22.
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