US embassy cable - 04MADRID4385

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