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Cablegate: Spain's 2005 Budget Tries to Balance Socialist

This record is a partial extract of the original cable. The full text of the original cable is not available.

161450Z Nov 04

UNCLAS SECTION 01 OF 02 MADRID 004385

SIPDIS

TREASURY PASS TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV SP
SUBJECT: SPAIN'S 2005 BUDGET TRIES TO BALANCE SOCIALIST
GOALS WITH FISCAL RESPONSIBILITY

REF: MADRID 162

1. SUMMARY: Vice President and Minister of Economy Pedro
Solbes Mira presented the Socialist government's first
General State budget to Congress on 30 September. After
passing the Chamber of Deputies, the budget has been
forwarded to the Senate for debate and approval. It will
then be returned to the Chamber of Deputies for final
approval. The budget reflects annual spending of
approximately EUR 250 billion (USD 325 billion), an increase
of 7.8% over the 2004 amount, and its surplus equals .1% of
Spain's GDP. The two main objectives of the budget are
increased social spending and increased productivity. The
programs with the highest spending increases in Solbes'
budget are: unemployment; civil research and development
(R&D); affordable housing; and social security. Programs
with decreased spending include: military R&D; subsidized
transportation; and miscellaneous economic programs. The
Solbes budget faces many challenges prior to approval,
including an uncertain economic environment, the rising cost
of petroleum, and tough negotiations with other political
parties. END SUMMARY.

INTRODUCTION
------------

2. Vice President and Minister of Economy Pedro Solbes Mira
presented the Socialist government's first General State
budget to Congress on 30 September. Solbes' stated goal is
budgetary stability while promoting productivity and
increasing social spending. His budget reflects a projected
income of approximately EUR 252 billion (USD 327.6 billion),
an increase of 7.7% over the 2004 amount, and annual spending
of approximately EUR 250 billion (USD 325 billion), an
increase of 7.8% over the 2004 amount. The resulting
proposed budget surplus equals .1% of Spain's GDP and can
primarily be attributed to social security tax income.

APPROVAL PROCESS
----------------

3. Spanish law requires approval of the budget from both
houses of Congress prior to implementation. Solbes' budget
has been debated within the Chamber of Deputies and various
amendments have been proposed, with one costly R&D amendment
approved to date. At this time, the budget has been
forwarded to the Senate for its debate and approval process.
The Senate should send the budget back to the Chamber of
Deputies during the week of December 21st for final approval.
If the budget proceeds through both houses of Congress
according to the government's schedule, it should receive
final approval during the last week of December. If the
budget is not approved by the end of the year, the spending
limits outlined in the 2004 budget will be carried over into
2005.

WINNERS
-------

4. A primary focus of the proposed budget is increased
productivity. The proposed budget increases spending in the
following areas: investment in infrastructure (up 9.1%);
investment in civil R&D, which will double over the next four
years (up 25.4% in 2005); and education (up 6%). The second
focus of the proposed budget is social programs, with social
spending increasing 9.5% and totaling slightly more than half
of government spending. Key line items include: affordable
housing programs (up 32.5%); unemployment (up 14.4%); social
security (up 45.1%); and an increased allowance for pensions.

LOSERS
------

5. The programs experiencing the greatest decreases in net
spending include: miscellaneous economic programs (-1.1%);
military R&D (-3.1%); and subsidized transportation (-12.7%).
(Note: in the budget, the government takes on the debt of
RENFE, the national train corporation. Although
transportation will receive less money in the budget, all of
its funding will go towards operational expenses as it no
longer needs to make debt payments, thereby keeping
government's pledge to develop infrastructure.)

ECONOMIC CONTEXT
----------------

6. Solbes' budget is based upon a predicted 3% economic
growth rate, an interest rate of 2% and petroleum costs of
$37 per barrel. Most Spanish economists describe this
economic scenario as optimistic at the least. Local
economists envision a less robust level of economic growth of
around 2% and most predict a rise in interest rates in the
near term, which may affect consumption. Lower economic
growth rates will reduce government income and may cause a
substantial gap between revenue and spending. Finally,
petroleum costs are currently well above the budget's
projected rate and could lead to a further consumption effect.

POLITICAL CONTEXT
-----------------

7. Politically, Zapatero's government is a minority
government requiring support of smaller regional parties to
pass legislation through the lower house. To pass the
Senate, which can only delay legislation, support of all
minority parties is needed. The opposition Popular Party has
criticized the government for bringing the budget to Congress
without agreements already arranged. Costly amendments have
already been added in areas like research and development.
The government is currently negotiating with regional parties
to prevent further delays and amendments from political
parties seeking concessions in return for their support.

COMMENT
-------

8. As the first budget of the Zapatero government, the 2005
budget is a crucial piece of legislation. Failure to pass
the budget in a timely manner, or with serious controversy,
would be a major embarrassment for both VP Solbes and PM
Zapatero. It could also prevent the minority government from
delivering on key campaign promises. The main challenge is
whether the budget will escape Congress with most of the key
goals intact. Budgetary concessions to political parties
would compromise its fiscal soundness. The subsequent
challenge is whether the economy will meet projected growth
levels and provide the revenue necessary to meet budgetary
needs.
ARGYROS

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