Bloomberg News

Rajoy Vows Leaner Public Sector Amid ’Dark’ Spain Outlook

December 20, 2011

(Updates with comments from Rajoy starting in second paragraph. For more on Europe’s debt crisis, click EXT4.)

Dec. 19 (Bloomberg) -- Prime Minister-elect Mariano Rajoy pledged to shrink Spain’s public sector and reduce spending to tackle the euro area’s third-largest budget deficit without saying how he’ll finance higher pensions and tax breaks.

“The one and only part of public spending that will increase is pensions,” Rajoy told lawmakers in Madrid today. “All other components may be reduced.” Pensions accounted for 112 billion euros ($146 billion) of spending in the 2011 budget.

Rajoy, whose People’s Party secured the biggest majority any Spanish party has won since 1982 in Nov. 20 elections, presented his program in Parliament today before taking office on Dec. 21.

Rajoy, who defeated the ruling Socialists with a campaign focused on the sovereign debt crisis, said he’ll freeze public hiring and “reshape” the public sector as he seeks to meet a pledge to regain investor confidence and recover Spain’s AAA credit rating. Rajoy didn’t give details of how he will execute the 16.5 billion euros in spending cuts that the outgoing government’s budget plan shows are needed next year.

“We see where the additional spending will come from, but I don’t see where the cuts will come from,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “Increasing pensions is a bit surprising, I would like to see more detail.”

Missing Target

Rajoy said he’ll announce spending cuts at his second Cabinet meeting on Dec. 30 as Spain’s budget deficit may exceed the outgoing government’s target of 6 percent of gross domestic product this year. A new budget will be presented for 2012 before March 31, he said.

Rajoy said one of his first bills will be a law to flesh out a constitutional amendment on budget discipline approved by his party and the outgoing Socialists in September. The law will call for the debt-to-GDP ratio to be cut to 60 percent by 2020 and for the structural public deficit to be limited to 0.4 percent of GDP, he said.

Rajoy inherits an economy which stalled in the third quarter and may contract in the final three months of the year, according to the Bank of Spain.

‘Couldn’t Be Darker’

“Expectations for the next two quarters are not good at all,” Rajoy said. With the economy “growing by half the rate of the rest of the European Union,” Spain is “being left behind” and “the outlook couldn’t be darker,” he said.

Spanish 10-year yields fell to 5.13 percent at 2:20 p.m. in Madrid from 5.31 percent on Dec. 16, and as high as 6.78 percent on Nov. 17, the most since 1997.

Adding to pressure on Rajoy, Fitch Ratings put six euro members including Spain on review for a possible downgrade on Dec. 16, saying a full solution to the debt crisis is “technically and politically beyond reach.” Fitch, which stripped Spain of its AAA rating in 2010, rates Spain AA-.

As well as spending cuts, Rajoy said the banking system needs to be cleaned up as the industry tightens credit amid 176 billion euros of troubled assets linked to real estate.

He said banks would have to straighten out their balance sheets by selling off finished property and carrying out a “very prudent” valuation of less-liquid assets such as land and unfinished real-estate projects.

Rajoy also pledged to overhaul the labor market in the first quarter to give companies more flexibility on how they organize and pay their staff.

Re-invested profits from companies will be taxed 10 percentage points less than those paid to shareholders and taxes will be reduced for small enterprises, Rajoy said.

He told lawmakers his government would “improve” the tax treatment of private pensions and bring back a tax rebate for the purchase of homes.

--With assistance from Manuel Baigorri in Madrid. Editors: Jeffrey Donovan, Fergal O’Brien

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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