Spain's new budget aims at spending cuts not tax rises

Spain announced a detailed timetable for economic reforms and a tough 2013 budget based mostly on spending cuts on Thursday in what many see as an effort to pre-empt the likely conditions of an international bailout.

Ministry budgets were slashed by 8.9 percent for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the euro zone's biggest deficits while unemployment benefit costs rise in a recession.

"This is a crisis budget aimed at emerging from the crisis ... In this budget there is a larger adjustment of spending than revenue," Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.

Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because EU paymaster Germany insists Spain doesn't need help.

The conservative government said tax revenue would be higher than originally budgeted in 2012 -- partly due to a hike in value-added tax (VAT) -- and would grow by 3.8 percent next year from this year.

Central government spending would be cut by 7.3 percent while revenue would rise 4 percent in 2013 including a big leap in VAT income. Regional budgets will be presented individually through the year. More details will be announced on Saturday, when the proposal goes to to parliament.

Spain, the euro zone's fourth largest economy, is now at the centre of the euro zone's debt crisis. Investors fear Madrid cannot control its finances and question whether Rajoy has the political will to take all the necessary but unpopular measures.

Madrid is talking to EU authorities about the terms of a possible aid package that would trigger an European Central Bank bond-buying programme and ease Spain's unsustainable funding costs.

Brussels has demanded an independent budget oversight entity, which Economy Minister Luis de Guindos said on Thursday would be created to review budget execution. The government is still analysing potential conditions for aid, he said.

Uncertainty over Spain's ability to slash the public deficit to 6.3 percent from close to 9 percent last year, and control spending in regional governments, has been stoked by demands for independence in Catalonia.

The autonomous region's parliament voted on Thursday to hold a referendum on independence, but Saenz de Santamaria said the region must consult the rest of the country first.

Pensions, earmarked by the European Commission as a key area for reform, will rise by 1 percent next year but Treasury Minister Cristobal Montoro would not be drawn on whether the government would pay an inflation catch-up which could be over 3 percent this year.

Before the end of the year the government will announce a pension reform that will restrict early retirement.