Aznar faces tough choices in preparing first budget

Date: 05/09/1996

By Pedro Lopez de Pablo

THE hour of truth is coming for Spanish Prime Minister Jose María Aznar.

Later this month, Aznar will present to the Cortes (parliament) his proposals for the 1997 budget, a plan which must reduce his country's public deficit from 6&percent; to 3&percent; of Gross Domestic Product if Spain is to be a founding member of economic and monetary union.

Since his first day in government, Aznar has displayed a zealous faith in Spain's rendezvous with EMU.

But in his first budget, he faces the task of making the biggest and most unpopular spending cuts in the history of Spain's young democracy.

There are no magic formulas.

Aznar can only cut the deficit enough to reach the targets demanded in the Maastricht Treaty by reducing spending and increasing receipts. His proposal must be convincing enough to make the Spanish economy grow by more than the EU average next year - around 3&percent; of GDP.

He must also ensure that inflation continues its current descent so that the Banco de España can lower its interest rates to bring them closer to French and German levels.

But if, in theory, Spain's economic performance can be brought up to scratch in time for the start-date for the single currency, in practice it will be more difficult.

First, Aznar's budget proposal must win the support of his partners in government - the Catalan nationalists, led by Jordi Pujol, and the Basques. Agreement is not far off, however, primarily because the opposition Socialist Party has not presented an alternative. The attention of the Partido Socialista Obrero Español (PSOE) and its leader Felipe González has been focused on the Supreme Court, as the former Spanish premier waits to be called to testify in the hearings on the dirty war against the ETA terrorist group allegedly led from the Interior Ministry.

Secondly, the budget plan must avoid creating revolution in certain economic and social sectors. Some areas, such as construction, will be hit anyway because of reduced public spending on infrastructure and housing. The main concern will be, however, to keep the unions calm despite plans to freeze civil servants' wages - a move that could provoke fierce social confrontation on a scale similar to last winter's strikes in France.

The final obstacle standing in the way of Spanish hopes of meeting the EMU deadline could be opposition to any increase in taxes from citizens who were promised relief from such increases during March's electoral campaign.

Economics Minister Rodrigo Rato has anticipated several unpopular measures which could be included in the draft budget. These have already elicited angry responses. Among them are the possible introduction of a tax on water, tolls on highways, supplementary charges for visits to the doctor, an increase in pharmaceutical prescription prices and taxes on alcohol, tobacco and petrol.

Any of these could spark a drop in consumption, which in turn would prevent the economy from maintaining the 2&percent; growth rate that Spain achieved in the first months of this year.

Being in the first wave of EMU members is, for Aznar, “a political and economic opportunity” without precedent for Spain. Whether the lure of such an opportunity will be enough to convince ordinary citizens to go along with Aznar's budget plans remains to be seen.