Spanish cabinet approves austerity budget for 2011

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Spain's government on Friday approved a tough austerity budget for 2011 aimed at reassuring nervous markets over its ability to rein in a massive public deficit and fix its battered economy.

The proposals, which include new tax hikes for the wealthy, must now go to parliament, where the government does not hold an absolute majority but is hopeful of ensuring its successful passage.

Failure to pass the budget by the end of the year could bring down the six-year-old government of Prime Minister Jose Luis Rodriguez Zapatero and force new elections.

"It is the most austere budget in recent years," Finance Minister Elena Salgado told a news conference following a cabinet meeting.

It envisages an overall cut in government expenditure of almost eight percent compared to this year.

It calls for a hike of one percentage point in income tax for those who make more than 120,000 euros (160,000 dollars) a year and of two points for those earning over 175,000, measures apparently aimed at easing concerns over the austerity package among the general population.

Ministerial expenditure will also be slashed by 16 percent.

"The government adopted a budget that advances fiscal consolidation and lays the groundwork for economic recovery," the finance ministry said in a statement.

It said the proposals were aimed at ensuring the government meets its target of narrowing the public deficit to 6.0 percent of gross domestic product next year.

Markets have been jittery over Spain's high public deficit in recent months, fearing the country could suffer the same fate as Greece, which needed a bailout from the European Union.

Salgado said the government had revised downward its deficit for 2009 to 11.1 percent of GDP from 11.2 percent.

Spain's economy, Europe's fifth-largest, fell into recession in late 2008 as the global financial meltdown accelerated a collapse of the once-booming property sector.

It only emerged in the first quarter of this year with tepid growth of 0.1 percent.

The recession has sent the country's unemployment rate soaring to more than 20 percent, the highest in the 16-nation eurozone.

Salgado said government had forecast an unemployment rate of 19.3 percent of the work force in 2011, up from the previous estimate of 18.9 percent as "the recovery in employment is slower than we would like."

The rise in joblessness has in turn jacked up government spending on unemployment benefits.

In a bid to shore up its public finances, the government in May passed a 15-billion-euro austerity package that included an average state employee salary reduction of five percent and a pensions freeze.

That was on top of a 50-billion-euro package of spending cuts announced in January designed to progressively slash the public deficit to the eurozone limit of three percent of gross domestic product by 2013.

Spain's parliament on September 9 also gave final approval to a sweeping overhaul of a rigid labour market that will make it easier and cheaper for employers to hire and fire workers.

Spain's two main unions have called a general strike for September 29 to protest the measures.

Zapatero's minority government indicated on Wednesday that the Basque Nationalist Party (PNV) would back the budget when it comes up for a vote this year in return for concessions on employment in the Basque Country.

With 169 seats in Spain's 350-member assembly, Zapatero's Socialists are seven short of a majority and pass legislation on a vote-by-vote basis with the backing of smaller parties whose support has become increasingly uncertain.

But the PNV has six deputies and, even with their support, the Socialists would still need to find the extra seat.

The main conservative opposition Popular Party and a Catalan regional party, the Convergencia and Union, which has 10 seats, have already indicated they will not support the budget.

© 2010 AFP

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