Spain’s Rajoy Postpones Crucial Cuts, Risking Deficit Miss

Spain may postpone deeper budget cuts until after a regional election in March in a political move that puts the nation at risk of missing its deficit goal for the second year.

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The ruling People’s Party, led by Prime Minister Mariano Rajoy, “doesn’t want to get burnt before the Andalusian election,” said Antonio Barroso, an analyst at Eurasia and a former Spanish government pollster. In March, the PP will seek to end 30 years of Socialist rule in the southern region of Andalusia, and “won’t take any kind of measure that would undermine its ratings in the region.”

Since the PP government took over on December 21, Spain’s 10-year bond yields have risen 10 basis points to 5.5 percent, increasing the spread between Spain’s benchmark bonds and German bunds of similar maturity to 359 basis points.

Rajoy must cut the equivalent of 3.6 percent of gross domestic product off the budget deficit this year in order to meet a European Union target just as Spain may be entering its second recession in two years. By postponing steps until after the March 25 election……Rajoy risks undermining confidence in Spain’s ability to meet its goal, and could send borrowing costs higher. Fitch Ratings already has “doubts” the country will reach its goal.

After its second Cabinet meeting on December 30, the PP announced 15 billion euros of budget cuts and spending of 1.4 billion euros to raise pensions. It increased income taxes and created a new bracket for those earning more than 300,000 euros a year, breaking an election pledge and adopting a Socialist proposal for greater levies on the wealthy.

Budget Minister Cristobol Montoro has asked the EU to ease Spain’s 2012 deficit target, saying this year’s goal was based on outdated growth forecasts. Spain’s economy may shrink 1.5 percent this year if the government meets its deficit goals, the Bank of Spain estimated today. The economy contracted 0.3 percent in the fourth quarter from the previous three months. However, Deputy Minister Soraya Saenz de Santamaria and Economy Minister Luis de Guindos have both pledged to meet the target.

States like Andalusia are crucial to Spain’s efforts to cut the budget deficit as they control more than 30 percent of public spending, hire half of all public workers, and use most of their budgets for healthcare and education. Rajoy blames their failure to reduce spending last year for the country missing its deficit-reduction target.

The 4.4 percent deficit goal set for 2012 was made by the former administration and based on a growth forecast of 2.3 percent. However, Rajoy still pledges to stick to the target and his deputy, Saenz de Santamaria, said on January 20 that the government is “determined” to meet its commitments and has the “will” to do so. The 2012 budget is due in Parliament at the end of March.

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