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Cablegate: Spain's 2008 Proposed Budget Combines Spending

VZCZCXRO0396
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #2083/01 3111413
ZNR UUUUU ZZH
P 071413Z NOV 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 3767
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 MADRID 002083

SIPDIS

SIPDIS

STATE FOR EUR/WE, EB/IFD/OMA

E.O. 12958: N/A
TAGS: SP ECON EFIN PGOV
SUBJECT: SPAIN'S 2008 PROPOSED BUDGET COMBINES SPENDING
INCREASES, FISCAL RESPONSIBILITY

REF: A. MADRID 1942
B. MADRID 1902

1. Summary. With only four months left until general
elections, the PSOE government has successfully side-stepped
attempts led by conservative opposition Partido Popular (PP)
representatives in the Chamber of Deputies to derail its 2008
proposed budget. The Administration's budget focuses heavily
on social spending, infrastructure, and R&D investment. In
addition, it provides increases in its support to
international development assistance and all ministries,
while projecting a budget surplus for the fourth year
running. Following the Administration's well-publicized
announcements of additional housing, health, and child
benefits, the PP accused the governing party of developing an
"electoral budget" while insufficiently funding the
autonomous communities. Additional criticisms have focused
on the budget's now-overly-optimistic growth and revenue
calculations. Despite these criticisms, the budget seems
headed for approval by the end of the year with only minor
amendments likely. End Summary.

---------------
Budget Overview
---------------

2. On September 25, the Administration unveiled its 2008
budget to the parliament, proposing a spending increase of
7.2 percent in nominal terms over the 2007 budget. With
projected spending of 289.9 billion euros and revenues of
301.6 billion euros, this budget anticipates a surplus for
the fourth year in a row. Topping the list of priorities are
increased spending in R&D and infrastructure (17.4 percent
and 9.4 percent increases, respectively), education (14
percent increase), housing (10 percent), pensions (7.2
percent), and international development assistance (27
percent).

3. The bill also proposes a 51.1 billion euro contribution
towards paying down the public debt. Such a payment would
lower the public debt to 34 percent of GDP, the lowest level
in more than 20 years. Of the total budget, roughly
one-third is projected for social security, slightly over
one-third will fund central government operations, and the
remaining one-third will be split primarily between paying
down the public debt and supporting the autonomous and local
governments. Of this last third, an amount of 12.4 billion
is alloted for Spain's EU contribution. The

4. Among the high-profile spending proposals recently
announced by President Zapatero and his cabinet are measures
to give families 2,500 euros for each newborn child, measures
to cap electricity rates, and measures to subsidize rental
housing for young workers and provide free dental care for
children ages 7-15. Despite speculation that a slowing
economy may not produce the tax revenue anticipated for 2008,
the Administration has nonetheless maintained that the
budget, with its surplus cushion, will be able to support
these new spending initiatives.

------------------------
Opposition to the Budget
------------------------

5. During the October 25 Chamber of Deputies budget debate,
six parties proposed a record-breaking six "amendments to the
total," which if any one had passed, would have forced the
Administration to reformulate the budget in its entirety.
The PP, which opposed the budget, argued that the
Administration's "election-oriented" budget was overly
slanted towards currying votes and did not adequately invest
in the autonomous communities. The IU (United Left) argued
that the proposed budget did not include sufficient social
spending, and Catalan parties CiU and ERC argued that the
budget failed to address their regional needs, particularly
in the wake of this year's electricity and railroad problems
in Barcelona.

6. The PSOE managed to defeat all six of the "amendments to
the total" by a slim margin (177 to 168, with 1 abstention
and four absences). The 13 votes in addition to the PSOE's
164 came from the Basque region's National Basque PNV party
(7 votes), the Galician BNG (2), the Aragonese CHA (1), the
Canary Islands CC (1), and two PP members, one of whom voted
with the government by mistake. Catalan parties CiU and ERC
ultimately sided against the government.

7. Having avoided being sent back to the drawing board, the
bill is now with the Chamber of Deputies' Budget committee,
which is reviewing piecemeal amendment proposals. The bill

MADRID 00002083 002 OF 002


is expected to be approved by the full Chamber on November
15, after which it will go to the Senate. Although the bill
may be slightly amended in either house, it is expected to be
approved before the end of the year and take effect January
1, 2008.

-------
Comment
-------

8. Given the generous nature of this year's ample budget, the
PP has attempted to focus on universal sore points in Spain's
politics, including funding for the autonomous communities.
The government has also been criticized for its overly
optimistic revenue estimates, particularly in the wake of
Vice President Pedro Solbes' recent acknowledgement that the
assumed 3.3 percent 2008 growth rate on which revenue
forecasts were based will more likely be around 3 percent
(which is still a few tenths above the estimates of the IMF
and some banks). Solbes has made assurances that the surplus
cushion will more than amply cover any deterioration due to
the reduced growth projection.

9. Despite these criticisms, the government seems to be
operating from a position of strength on fiscal matters.
During the past four years, helped by rapid economic growth,
it has managed to steadily increase social spending and
investment while maintaining a budget surplus. With growth
expected to slow during 2008, whichever government prepares
the following year's budget may have a more difficult task.

--------
Appendix
--------

10. Breakdown of proposed spending:

Total budget: 349.4 billion euros

I. Pensions and miscellaneous: 115.1 billion euros (7.7
percent increase over 2007 budget)
II. Autonomous Communities/Local government: 52.4 billion
euros (7.9 percent increase)
III. Debt Repayment: 51.1 billion euros (4.3 percent increase)

IV. Ministry Funding: 104.6 billion euros

-Ministry of Labor and Social Affairs: 26.2 billion euros
(11.5 percent increase)
-Ministry of Infrastructure and Public Works: 12.3 billion
euros (4.5 percent increase)
-Ministry of Defense: 9.7 billion euros (5.5 percent increase)
-Ministry of Interior: 9.2 billion euros (9.2. percent
increase)
-Ministry of Agriculture: 9.1 billion euros (10.2 percent
increase)
-Ministry of Industry, Tourism, and Commerce: 8.4 billion (9
percent increase)
-Ministry of Science and Education: 6.6 billion euros (14.8
increase)
-Ministry of Economy and Finance: 5.2 billion euros (3
percent increase)
-Ministry of Environment: 4.2 billion euros (9 percent
increase)
-Ministry of Foreign Affairs and Cooperation: 3.4 billion
euros (52 percent increase)
-Ministry of Public Administration (2.5 billion euros (10
percent increase)
-Ministry of Justice: 1.5 billion euros (10 percent increase)
-Ministry of Housing: 1.4 billion euros (9.7 percent increase)
-Ministry of Health and Consumption: 893 million euros (14.4
percent increase)
-Ministry of Culture: 874 million euros (5.2 percent increase)
-Other ministries: 2.9 billion (14 percent increase)

V. Miscellaneous Funding: 26.2 billion euros (includes EU
funding, parliament, royal housing expenses, etc.)


AGUIRRE

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