Regions will escape the pain of new cuts, says finance minister

The additional five billion euros Brussels has told Spain it must cut from this year’s budget will primarily affect central government spending, Finance Minister Cristóbal Montoro told Congress on Tuesday, sending a sign of relief to regional premiers who until now thought they would have to impose more sacrifices on their constituents.

Meeting in Brussels late Monday, the euro zone’s 17 finance ministers agreed to give Spain some leeway in meeting its deficit-reduction target by reducing the figure to 5.3 percent of GDP this year but at the same time insisting the country keep to its second objective of three percent for the end of 2013.

“Spain is absolutely committed to the budgetary adjustment,” Economy Minister Luis de Guindos told reporters in Brussels.

Prime Minister Mariano Rajoy had set alarm bells ringing when he surprised European leaders by announcing that Spain would change the figure to 5.8 percent from the 4.4 percent of GDP agreed upon last year. The Popular Party (PP) prime minister didn’t consult other leaders or the Eurogroup before making the announcement at the end of the last EU summit.

Foreign Minister José Manuel García-Margallo argued that the fact that Europe had allowed his government to raise the deficit target from the original 4.4-percent figure was a victory for Spain.

“The Spanish government has won this battle,” García-Margallo said on the Cadena Ser radio network.

Finance Minister Cristóbal Montoro told lawmakers that the central government would have “to give up on spending projects” to reach the new 5.3-percent mark, but he didn’t give any examples as to where the budget ax would swing.

The opposition was quick to suggest that new tax hikes were in the making. Indeed, earlier in the day De Guindos suggested that value added tax (VAT) may be raised next year.

“What we will have to do is bring forward this year the spending adjustments that we have to make in 2013,” Montoro said, adding that the PP would ensure the savings strategies “won’t affect the most needy.”

The PP government has been careful not to release many details of its spending plans before the upcoming regional elections in Andalusia and Asturias. The PP is expected to wrest the Socialists’ 30-year hold on power in the Andalusia regional elections on March 25, according to most opinion polls. Any drastic cuts in social spending could give the Socialists ammunition in a region hit the hardest by unemployment.

Ministry cuts

Rajoy announced on Monday that the Cabinet would approve the 2012 budget on March 30. The government planned on 30 billion euros in spending cuts to meet the original 5.8-percent goal but will now have to look at cutting anywhere between 35 to 37 billion euros, in which the biggest chunk will be made at the ministries, Montoro told Congress.

Economy Minister De Guindos muddied the issue earlier in the day when he said the cuts “would be equally shared” by all agencies, including the regions.

But PP parliamentary spokesman Alfonso Alonso also denied the regions would be affected.

“There won’t be any extra burdens,” Alonso said, reminding reporters that the Finance Ministry had reached a Brussels-type agreement with the premiers that will see them reduce their budget deficits to 1.5 percent this year.

Spain closed 2011 with a deficit figure of 8.5 percent of GDP — 2.5 percentage points more than the Socialist government had projected. Runaway spending in the regions was to blame for the figures.

To meet the new 5.3-percent goal, the central government deficit will have to be reduced from 5.10 percent to 3.5 percent, Montoro said.

The government’s announcement of bigger spending cuts didn’t affect the rally the blue chip Ibex 35 was experiencing following the announcement from Brussels. It closed up 2.4 percent at 8,376.80 points — its best showing of the year so far.