Spain announced a detailed timetable for economic reforms and a tough 2013 budget based primarily on spending cuts on Thursday in what many see as an effort to pre-empt the likely terms of any international bailout.
Government ministries saw their budgets slashed by 8.9 percent for next year, as Prime Minister Mariano Rajoy's battle to reduce one of the eurozone's biggest deficits was made harder by falling tax revenues in a prolonged recession.
However, the conservative government said tax revenue would be higher in 2012 than it had been originally budgeted for and would grow 3.8 percent in next year from this year.
Spending cuts would be worth 0.77 percent of gross domestic product in 2013, while adjustment in revenue would be worth 0.56 percent of GDP.
"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.
Spain, the eurozone's fourth largest economy, is at the centre of the crisis. Investors fear that Madrid cannot control its finances and that Rajoy does not have the political will to take all the necessary but unpopular measures.
Madrid is talking to Brussels about the terms of a possible European aid package that would trigger a European Central Bank bond-buying program and ease Madrid's unsustainable borrowing costs.
Saenz de Santamaria said the government would included 43 new laws to reform the economy over the next six months.
It will also present reforms to the pension system by year-end.
Uncertainty over the timing of an aid request and divisions within the European Union over a plan to create a banking union sent the yield on Spain's 10-year bond on Thursday to its highest since the ECB announced its bond-buying plan on Sept. 6.
"The first impression is good, heading towards a major adjustment in spending rather than in revenues," said Jose Luis Martinez of Citigroup, in Madrid.
"However, we see as too optimistic the macroeconomic assumption of 0.5 percent recession for the next year. We see a scenario with a deeper recession and if this were the case, further spending cuts will be needed."
© 2014 Thomson/Reuters. All rights reserved.