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Spain announced a detailed timetable for economic reforms and a tough 2013 budget based mostly on spending cuts on Thursday in what many see as an effort to pre-empt the likely conditions of an international bailout.
Ministry budgets were slashed by 8.9 percent for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the euro zone's biggest deficits while unemployment benefit costs rise in a recession.
"This is a crisis budget aimed at emerging from the crisis ... In this budget there is a larger adjustment of spending than revenue," Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.
Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because EU paymaster Germany insists Spain doesn't need help.
The conservative government said tax revenue would be higher than originally budgeted in 2012 -- partly due to a hike in value-added tax (VAT) -- and would grow by 3.8 percent next year from this year.
Central government spending would be cut by 7.3 percent while revenue would rise 4 percent in 2013 including a big leap in VAT income. Regional budgets will be presented individually through the year. More details will be announced on Saturday, when the proposal goes to parliament.
Spain, the euro zone's fourth largest economy, is now at the centre of the euro zone's debt crisis. Investors fear Madrid cannot control its finances and question whether Rajoy has the political will to take all the necessary but unpopular measures.
Madrid is talking to EU authorities about the terms of a possible aid package that would trigger an European Central Bank bond-buying programme and ease Spain's unsustainable funding costs.
Brussels has demanded an independent budget oversight entity, which Economy Minister Luis de Guindos said on Thursday would be created to review budget execution. The government is still analysing potential conditions for aid, he said.
Uncertainty over Spain's ability to slash the public deficit to 6.3 percent from close to 9 percent last year, and control spending in regional governments, has been stoked by demands for independence in Catalonia.
The autonomous region's parliament voted on Thursday to hold a referendum on independence, but Saenz de Santamaria said the region must consult the rest of the country first.
Pensions, earmarked by the European Commission as a key area for reform, will rise by 1 percent next year but Treasury Minister Cristobal Montoro would not be drawn on whether the government would pay an inflation catch-up which could be over 3 percent this year.
Before the end of the year the government will announce a pension reform that will restrict early retirement.
ECONOMIC REFORM TIMETABLE
The deputy premier said the government would set out 43 new laws to reform the economy over the next six months and including reforms to the labour market, public administrations, energy services and telecommunications sectors.
The detailed timetable for economic reforms goes beyond what the European Commission has required and is an ambitious step forward, the EU's top economic official said on Thursday in response to the government announcements.
"The reforms are clearly targeted at some of the most pressing policy challenges," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
Market reaction was cautious.
"The first impressions (of the announcements) are good, heading towards a major adjustment in spending rather than in revenues," said Jose Luis Martinez of Citigroup, in Madrid.
"However, we see as too optimistic the macroeconomic assumption of 0.5 percent recession for the next year. We see a scenario with a deeper recession and if this were the case, further spending cuts will be needed".
De Guindos' statement that the 2012 budget deficit target would be met this year due to a solid increase in revenues will also be viewed with suspicion with many economists expecting the government to miss its deficit target.
The measures continue to heap pressure on the crisis-weary population and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police are given the green light to use force to disperse crowds.
A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes since a housing bubble birst in 2008 and plummeting consumer and business sentiment tipped the country into a four-year economic slump.
The prime minister's image, both at home and abroad, has deteriorated rapidly since his party won an absolute parliamentary majority last November.
Newspaper pictures of Rajoy enjoying a cigar on Sixth Avenue in New York on Wednesday while protesters gathered in Madrid fuelled criticism of his detached attitude toward Spain's mounting problems.