Spain vows to stick to 2012 deficit target

MADRID- "Reducing the public deficit to 5.3 percent this year is absolutely indispensable, a goal which we will not renounce," he said as he defended his conservative government's budget for 2012 at a meeting of his Popular Party.

Rajoy's budget for 2012 -- approved by his cabinet on Friday -- includes 27 billion euros $36 billion) worth of spending cuts and tax hikes.

It is Spain's most austere budget since the country returned to democracy following the death of dictator General Francisco Franco in 1975.

The budget freezes public sector wages, raises taxes on tobacco and closes tax loopholes and rebates for large companies.

But pensions and jobless benefits were spared amid rising public anger at the dire economic situation where unemployment has soared to over 23 percent.

Most analysts say Spain will need austerity measures worth around 50 billion euros if it is to meet its deficit target for this year.

This means regional and municipal governments will have to make spending cuts as well on top of the austerity measures included in the central government's budget for this year.

"Regional and local governments will also have to make an effort, they also most reduce their public deficit and their spending," Rajoy said during a speech to mark his first 100 days in office.

"It is not the time to build pavilions, highways, airports," he added in a reference to the infrastructure building spree by local governments in the run-up to collapse of a property bubble in 2008 that sent the Spanish economy into a tailspin.

Spain's 17 regional governments, which are responsible for healthcare and education, ended 2011 with a public deficit equal to 2.94 percent of national gross domestic product.

The central government has set a deficit target for the regional governments this year of 1.5 percent.

Spain -- which overshot its public deficit target last year -- is racing to slash it so as to reassure markets that it will not follow Greece, Ireland and Portugal in requesting an international bailout.

The country posted a public deficit -- the broad shortfall between spending and revenues -- of 8.51 percent of GDP in 2011, far above the target for the year of 6.0 percent.

The European Union has agreed to let Spain aim for a public deficit equal to 5.3 percent, a much less-demanding goal than the original 4.4 percent agreed by the previous Socialist government with Brussels.

But meeting the deficit target is complicated by the fact that Spain is heading back into recession, with the government predicting the economy will contract by 1.7 percent this year.

"Spain is going to be in the place that it deserves, it is going to once again be a country that meets its targets," said Rajoy, who won power in a landslide general election in November.

The prime minister defended his new government's record, saying "during these first 100 days we have put in place many reforms which will produce effects in the future.

"We have carried out more reforms in three months than during the past seven years (of Socialist rule)," he added.

Among the reforms were changes to the labour code that make it easier and less expensive to fire workers which have sparked street protests and a general strike on Thursday.

Rajoy's government has more reforms in the pipeline, including changes to the public service and eliminating the duplication of services between the central and regional governments.