Spain pushes austerity in 'extremely fragile' period

Spain's government warned Tuesday that the country must pursue its most austere budget since the Franco-era if it is to weather a period of heightened vulnerability.

Budget Minister Cristobal Montoro told parliament there was no other option as he presented a 2012 budget with 27 billion euros ($36 billion) in austerity measures.

Fiscal tightening in the budget, aimed at slashing annual budget shortfalls and curbing mushrooming debt, was the toughest since the return to democracy after the 1975 death of General Francisco Franco.

"We are in an extremely delicate moment as a country, an extremely fragile moment as a country," Montoro, whose conservative Popular Party took power in December, told parliament.

"This is the most austere budget since democracy, and it is aimed at being the most realistic that Spain needs to overcome this crisis situation," the minister added.

"It is appropriate for a recession, which began at the end of 2011."

The Bank of Spain said Monday the economy had tipped back into recession, with output shrinking 0.4-percent in the first quarter of 2012 after a 0.3-percent decline in the final quarter of 2011.

The recession makes it even harder for Spain to meet its targets to reduce the public deficit because it tends to lower the state's income from taxes while raising its expenses for welfare.

Concerns over Spain's capacity to rein in the deficit have hammered the stock market and pushed up the country's borrowing rates, making it even more costly to finance its debt.

"This budget is aimed at regaining confidence among Spanish people, the confidence of our European partners in Spain and the confidence of the markets," Montoro said.

"There is no other way, there is no shortcut," he added.

The budget minister acknowledged that the path of fiscal austerity was "difficult, of course".

Government austerity plans, including in education and health, have prompted street protests in a country already buckling under an unemployment rate approaching 23 percent.

The government says it has no choice but to tighten the purse strings if it is to meet its targets to cut the annual public deficit to 5.3 percent of economic output in 2012 and just 3.0 percent in 2013.

In its latest measures announced last week, the government said that from 2013 it will make pensioners pay for their prescription medicine as part of a health care reform that it says will save 7.0 billion euros.

Credit rating agency Fitch said Tuesday those measures will not be enough on their own to reduce spending by Spain's regional authorities that control health budgets.

The health care reform "should be credit positive in that they will reduce the escalating cost of the provision of health care by the regions," it said.

But "further reforms are needed and are likely, not exclusively in healthcare," it added.

"Without full details, it is difficult to assess whether these reforms will save the targeted 7.0 billion euros, or 10 percent, of public healthcare spending."

Last year, the previous Socialist government presided over a public deficit that hit 8.5 percent of gross domestic product -- 2.5 percentage points over the target agreed with the European Union.

Prime Minister Mariano Rajoy said Spain had no choice but to follow his party's tough economic prescription, in comments to journalists in the corridors of parliament on Tuesday.

"The economic policy being carried out by the government is a hard, costly economic policy," he said.

"It won't have an effect in the short term. But it is what has to be done at this time."


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