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Spain reveals deep cuts to meet deficit goal

Tags: euro zone, Spain
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Spain announced deep cuts to its central government budget on Friday as it battles to convince European partners and debt markets it can rein in its budget deficit.

The government said it would make savings of 27 billion euros ($36 billion US) for the rest of 2012 from the central government budget, equivalent to around 2.5 percent of gross domestic product. The figure includes tax rises and spending cuts of around 15 billion euros announced at the end of December.

The cuts come despite popular resistance - a general strike on Thursday disrupted transport, halted industry and on occasion erupted into violence - and against a grim economic backdrop; Spain is thought to have fallen back into recession in the first quarter and has the highest unemployment rate in the European Union.

"Everyone knows the difficult problem we face in this country, and it calls for special efforts in fiscal consolidation and structural reforms to grow and create employment," Deputy Prime Minister Deputy Prime Minister Soraya Saenz de Santamaria said after the weekly cabinet meeting on Friday.

The government, which swept to power in November with the largest Parliamentary majority in 30 years, has already passed labour market and banking sector reforms to improve competitiveness and reduce wage costs.

Brussels has agreed to let Prime Minister Mariano Rajoy aim for a 2012 deficit equal to 5.3 percent of gross domestic product, a less demanding goal than the original 4.4 percent but a substantial improvement on last year's 8.5 percent.

The government said it was aiming for a central government deficit equivalent of 3.5 percent of GDP, a regional deficit of 1.5 percent of GDP and a balanced social security budget.

The regions announced a deficit of 2.9 percent of GDP in 2011, meaning they would have to cut around 15 billion euros to meet the 2012 target.

SCARCE DETAILS

Details were scarce, with the government due to set the budget to Parliament on Tuesday, but some economists are concerned that deep austerity measures could hurt already weakened growth and further danger the deficit targets.

Total cuts of over 42 billion euros between the central administrations and the regional authorities could be tough for an economy struggling to grow, economists warn.

"This is as austere as it gets. It's a tightening of fiscal policy until the pips squeak. There can be no doubting the government's willingness to curb Spain's excessive budget deficits," said Nicholas Spiro at Spiro Sovereign Strategy.

Prime Minister Mariano Rajoy cannot afford to upset nervous bond markets that pushed the yield premium for Spanish 10-year debt on Thursday close to their highest levels since early January, though that eased slightly on Friday.

Markets fear the government, which took power at the end of last year, will fail to deliver the budget cuts even though the European Union has softened the deficit targets.

"We will have to see how the details later stack up, with nothing much to say about the first run of headlines, but the general story remains one of substantial fiscal slippage over 2011-2012, additional pressure on growth from adjustment, and a fair amount of doubt about whether even the revised targets will be met under sharply negative growth projections," said Ben Levett, analyst at consultancy 4Cast.

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