Cabinet approves “recovery” state budget for next year

The Spanish Cabinet on Friday approved the draft state budget for next year, the first of the “recovery” in which the government pledged to continue with its austerity drive to reduce the budget deficit, but with no more tax hikes.

As had been flagged earlier this week by Prime Minister Mariano Rajoy, the 2014 budget is underpinned by a growth forecast of 0.7 percent, up from a previous government estimate of 0.5 percent, which should be sufficient to create jobs, albeit a minimum amount.

At a news conference after the Cabinet meeting, Deputy Prime Minister Soraya Sáenz de Santamaría said the “budget is reasonable and realistic” and aims “to contain spending and drive the recovery.”

The government took the opportunity to also revise its unemployment forecasts, with the average jobless rate for this year now seen at 26.6 percent instead of 27.1 percent previously. For next year, the government is predicting the average jobless rate will fall to 25.9 percent.

According to the latest Active Population Survey (EPA) carried out by the National Statistics Institute (INE), the unemployment rate fell to 26.3 percent in the second quarter from 27.1 percent in the first as the number of people out of work fell back below a record six million.

There will be net creation of jobs, small, insufficient, but still the first creation of jobs of the crisis"   Economy Minister Luis de Guindos 

However, the improvement reflected a fall in the size of the active population as a number of people gave up hope of finding a job and stopped actively searching for work. Most of the jobs created were also of a temporary nature and many of these were part-time.

“In terms of the EPA, there will be net creation of jobs, small, insufficient, but still the first creation of jobs of the crisis,” Economy Minister Luis de Guindos said. He put the figure at 0.1 percent, although the budget itself shows a fall in employment of 0.2 percent. That is because it measures the number of jobs that are equivalent to full time. In terms of counting jobs, the EPA does not distinguish between part-time and full-time employment.

Despite the absence of further tax hikes, the government is predicting revenues will rise 2.4 percent from this year to 179.750 billion euros as a result of stronger growth. Revenues for this year, when the government expects GDP to contract by 1.3 percent, will come in 2.340 billion euros below target.

The cap on spending, excluding finance charges, was set at 133.259 billion euros, an increase of 2.7 percent over this year as a result of higher funding for the Social Security system. The country’s 2.8 million public sector workers will see their salaries frozen for the fourth year in a row. However, a further 250 million euros has been set aside for educational grants for the most needy. Spending on unemployment benefits and programs to get people back to work is projected at 34 billion euros next year, representing a fall of 7 percent from the estimated amount for this year.

The allocation for research development and innovation has been raised by 71 million euros, while housing will receive 270 million more. The budget for culture was also increased by 1.7 percent.

As a result of an improvement in Spain’s risk premium, interest payments on public debt are projected to fall to 36.590 billion euros from a record 38.600 billion this year, even though total outstanding debt is expected to rise to over 96 percent of GDP.

The allocation for research development and innovation has been raised by 71 million euros

After being granted two more years to bring the public deficit back within the official European Union ceiling of 3 percent of GDP for all of a country’s administrations, the central government will only have to trim its deficit by 0.1 points to 3.7 percent of GDP.

Despite objections from the consultative body, the Economic and Social Council (CES), the government on Friday also approved a reform of the state pension system, setting a floor for annual pension hikes of 0.25 percent and a ceiling of the annual inflation rate plus 0.25 points. The CES said this arrangement would lead to a loss of purchasing power. Outlays on state pensions are set to rise 5 percent to about 130 billion euros next year.

The government also approved a bill decoupling public prices from the consumer price index (CPI), a process known as deindexation. Using a new formula that takes into account the inflation rate in the euro zone corrected for the loss of competitiveness suffered by the Spanish economy since the euro was introduced in 1999. The ceiling on price rises was set at 2 percent.

“The more decoupled from inflation an economy is, the more potential it has for growth and to create employment,” De Guindos said of the development.

According to a preliminary estimate released Friday by the INE, consumer price inflation plunged to 0.3 percent in September from 1.5 percent the previous month as a result of the impact of the hike in value-added tax rates introduced in September of last year having run its course. This was the lowest annual rise in the CPI since the end of 2009 when the economy was still in the grip of what has come to be known as the Great Recession in which inflation turned negative.