Spanish Budget for Deficit, not Recession in 2009

Spain unveiled a 2009 budget plan which forecast a narrowing deficit and moderate growth despite fears the economy will be in recession next year.

The budget saw growth in the euro zone's fourth largest economy sliding to 1 percent in 2009 from 1.6 percent in 2008 as the central government deficit narrows to 1.5 percent of GDP from 1.6 percent this year.

Solbes gave no estimate for the wider public sector, which includes social security, regional and municipal accounts, but promised it would not breach the EU's 3 percent deficit limit.

"This is the most austere budget the country has seen in years," Economy Minister Pedro Solbes said, adding that the economic environment was "possibly the worst in decades."

The draft budget stuck with growth forecasts that are far higher than those of Spanish banks, which see 1.4 percent GDP expansion in 2008 and 0.3 percent in 2009, according to a consensus forecast by the FUNCAS savings bank consultancy. The European Commission expects Spain to enter its first recession in 15 years by year end.

Economists said the budget forecasts were over optimistic and conditions would worsen in 2009 as the collapse of Spain's housing boom is exacerbated by the global financial crisis. "This is a long way from reality," said Carlos Maravall at the AFI consultancy in Madrid, who saw a risk of negative growth next year. "We think the deficit will get worse, not improve."

Spain's central government deficit has tripled in the last three months after Prime Minister Jose Luis Rodriguez Zapatero spent the public sector's 2007, 2.2 percent surplus on a 38 billion euro ($55.59 billion) economic stimulus package. The government expects Spain's first public sector budget deficit in four years in 2008 before accounts improve and return to equilibrium in 2010.

Underlying the 2009 budget were estimates investment in capital goods would remain stable in 2009 while household spending would ease slightly to 0.4 percent growth from 0.7 percent growth in 2008.

The government proposes a 2 percent increase in public spending and sees 2 billion euros in central government jobless benefit costs as unemployment rises to around 12.5 percent from a current 10.4 percent. "It's not at all clear they can meet these estimates," said Citibank strategist Jose Luis Martinez.

Spain's opposition conservative Popular Party (PP) said the budget condemned Spain to a high public sector deficit that would further complicate its ability to gain foreign financing. "This will bring more crisis, more unemployment and is the budget that puts us back into deficit," said PP economic spokesman Cristobal Montoro.

Solbes will present the budget to Congress on Tuesday and must pass it before year end. The government's Congressional coalition is seven seats short of a working majority but hopeful of picking up the extra votes from small regional parties.

Complicating approval are talks on a new scheme to share public funds among Spain's 17 autonomous regions. Catalonia's Socialist party (PSC), a core segment of the government's Congressional coalition, threatens to vote against the budget unless the government agrees on a new financing deal for Spain's strongest regional economy. Analysts see PSC leaders bluffing but say their threat underlines difficulties passing the budget at a time when all regions want more funds as public income falls across Spain.

Story from The Guardian