Spanish cuts set to hit public works

SPAIN will delay or cancel a fifth of its public works contracts as its battles a bulging budget deficit it was announced yesterday, in a move that economists believe could be a factor in tipping the country's fragile economy back into recession.

In all, 231 projects will be affected, the Ministry of Public Works announced.

The ministry said its budget for state-funded works will be cut by €6.4 billion (5.4bn) this year and next, forcing it to delay 199 contracts by between one to four years and cancel 32 others.

"We're aware that this will have an important effect on infrastructure companies... the civil works sector must be restructured," minister for public works Jose Blanco told parliament.

Spain's governing Socialists, led by prime minister Jose Luis Rodriguez Zapatero, has been under pressure to rein in spending after seeing a public surplus turn in to one of the eurozone's largest deficits in just two years as the economic crisis hit tax revenue and stimulus spending drained coffers.

The new measures are most likely to affect planned highway and railway contracts in the Spanish regions of Catalonia, Cantabria, Aragon and Castille and Leon, though the ministry did not give further details.

They are part of a €15bn austerity drive that follows on from wide-reaching stimulus measures last year.

Spain emerged from an 18-month recession in the first quarter of 2010 with quarterly growth of 0.1 per cent, and while the government expects growth each quarter this year, many economists are not convinced.

"Fading out these measures is definitely having an impact which is why we're still negative (on growth] over the next few quarters," said Citi economist Giada Giani.

Infrastructure associations such as Aerco, which represents dozens of small- and medium-sized builders, have expressed concern over the measures and some believe that the move is only the beginning of state spending cuts for the sector.

The government, which aims to deflate the deficit to 3 per cent of gross domestic product by 2013 from 11.2 per cent in 2009, will need more austerity than has already been announced, economists say.

"I don't think the current package is enough to reduce the deficit at the rate they would like and we expect more tightening to be announced in the 2011 budget proposal," Mr Giani said.

The government must present the 2011 budget draft to the Spanish parliament for debate before the end of September and it is expected to face resistance to what opposition parties say are measures aimed at appeasing markets at the cost of the economy.

Last month, Spanish civil servants staged a one-day strike to protest against wage cuts aimed at trimming a huge deficit and calming fears that the country was headed for a Greek-style debt crisis.

The stoppage was seen as a test of whether the trade unions have the support to stage a full-blown general strike over labour market reforms.

The reforms are deemed critical to resurrecting Spain's moribund economy and reassuring jittery investors who have sent the government's borrowing costs soaring.

The civil servant wage cuts, of an average of 5 per cent, are part of a plan to save €15bn this year and next. Spain has about 2.6 million civil servants, although few of them belong to unions.

Under the plan, which passed by just one vote in parliament, pensions are being frozen and there are cuts in government investment in infrastructure and spending on foreign aid.

The shift is a big U-turn for Mr Zapatero, who had resisted spending cuts until he came under fierce pressure from the European Union and the International Monetary Fund to address the economic problems.