Spain’s deficit swells to 11.4 percent of GDP, government announces austerity plan

Spain to cut spending to rein in deficit

MADRID — Spain will cut spending by nearly €50 billion ($70 billion) to rein in a deficit that has swelled to an outsized 11.4 percent of gross domestic product as the country struggles with recession, officials said Friday.

Finance Minister Elena Salgado said the government’s goal with the 4-year austerity plan is to trim the deficit to the EU limit of 3 percent of GDP in 2013.

Spain’s finances have come under scrutiny by ratings agencies and international investors worried about the possibility of another debt crisis like the one in Greece, which has shaken the European Union and pushed down the euro.

“It is a European requirement,” Salgado said of the deficit-slashing plan. “It is also a requirement of our stability laws, but above all it is a requirement to guarantee the kind of country we want in the future.”

She told a news conference that practically all government expenditure and policies will be affected by the cuts, except for social welfare benefits such as unemployment benefits, as well as investment in research and development and spending on education, foreign aid and anti-terrorism efforts.

Until now the government had estimated that the deficit for 2009 would be 9.5 percent of national output.

The even-worse figure of 11.4 percent, which Salgado called an estimate that is not yet final, triples the 3.8 percent at the close of 2008.

Ben May, of Capital Economics Ltd. in London, said the government’s measures were unlikely to offer the markets much comfort. The new deficit estimate puts Spain’s red numbers in line with the Greek and Irish shortfalls, and the fiscal recovery plan depends heavily on strong economic recovery to boost revenue, he said.

While a full-blown crisis like the one in Greece is unlikely in Spain, May said, “there’s not much here to relieve the pressure on Spanish government bonds.”

Spain has posted five straight quarters of economic contraction after a boom fueled by torrid real estate construction and credit-fueled consumer spending collapsed. It remains in recession even as other major European countries like Britain, France and Germany have pulled out of it, albeit tepidly.

The government has injected billions of euros (dollars) into the economy in job-creating public works and other projects. Along with increased outlays for unemployment benefits, this has caused the government’s budget deficit to soar.

Fourth quarter GDP figures have not been released, but Salgado said the economic contraction for the year would be 3.6 percent at most and 0.3 percent in 2010.

Those numbers are a far cry from the boom days of Spain’s recent economic growth. Until the crisis hit, Spain had posted nearly a decade of solid and sometimes robust expansion and was praised as a European success story. As recently as 2007, Spanish GDP rose 3.6 percent.

Now the government is working to retool the economy to make it less dependent on construction.

The government announced Friday that the jobless rate rose to 18.8 percent in the fourth quarter, up nearly a percentage point from the previous quarter.

Separately, Salgado announced a proposal to raise gradually the retirement age in Spain from the current 65 to 67 starting in 2013.

Spain’s retirement pension fund currently enjoys a surplus, but the government wants to raise the age to cope with a steadily graying population, with fewer and fewer workers to support a growing number of retirees, Salgado said.

She said the government would negotiate on this with opposition parties, business leaders and unions.