Bloomberg News

Spain to Enter Electoral Period as Rajoy Seeks Budget Cuts

August 27, 2012

Spanish Prime Minister Mariano Rajoy will push the deepest budget cuts in the nation’s democratic history amid local elections after Galicia and the Basque country brought polls forward to Oct. 21.

Galician president Alberto Nunez Feijoo, a member of Rajoy’s People’s Party, today said the local poll will be held in October instead of March 2013. He made the announcement a week after the Basque government took the same decision.

“This is an extraordinarily serious moment for the economy” that requires political stability to take decisions, Nunez Feijoo said during a televised news conference today in Santiago de Compostela.

Rajoy’s PP will campaign in the two northern regions as the government implements its fourth austerity package in eight months. The premier has given up on the economy returning to growth next year as he struggles to tackle the euro area’s third-largest deficit amid unsustainable borrowing costs.

“It’s going to be the first real test of Rajoy’s austerity,” Antonio Barroso, a political analyst at Eurasia Group in London said in a telephone interview. “Rajoy doesn’t have a lot of margin, he has to present a budget in September.”

Second Bailout

The yield on Spain’s 10-year benchmark bond has dropped 136 basis points from a euro-era intraday record of 7.75 percent on July 25 as investors speculate Rajoy may request a second bailout, involving the European Central Bank. The government signed off on up to 100 billion euros ($125 billion) of loans to shore up banks burdened with bad loans on July 24.

Spanish value-added tax will increase by 3 percentage points to 21 percent on Sept. 1 while jobless pay and civil servants’ wages will be cut in the coming months. The measures are part of a plan announced last month to triple austerity efforts to a total of 15 percent of annual gross domestic product through 2014.

Galicia and the Basque country have called polls as Spain’s 17 semi-autonomous regions are struggling to meet a combined deficit target of 1.5 percent of GDP this year and prepare budgets to meet a target of 0.7 percent next year.

Contribute to Stability

Rajoy has assigned the regions 70 percent of the nation’s deficit-cutting efforts this year and 44 percent next year after they were responsible for most of the deficit slippage last year. The European Union has set Spain a deficit goal of 6.3 percent of GDP for 2012, down from 8.9 percent last year.

Early elections in Galicia and the Basque country will contribute to political stability by avoiding too many votes in a short period of time, the PP’s chief Maria Dolores de Cospedal said today during a news conference in Madrid.

Cospedal said the government had no choice but to raise value-added tax and that the PP will conduct talks with unions and health-industry representatives to discuss budget cuts.

“This government has made very important reforms that aren’t always the most popular and that are meant to achieve the country’s recovery, not secure votes,” she said.

Support for the PP has slipped 8 percentage points since it won 40.6 percent of votes in a landslide in November. Rajoy broke his first election pledge within nine days of office by raising income tax. He turned his back on more promises in the following months as he scrapped a tax break for home owners and cut health care and education spending.

To contact the reporter on this story: 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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