Spain's Rajoy loosens purse strings, recovery boosts election-year budget

By Julien Toyer MADRID (Reuters) - Spain's Mariano Rajoy sought to persuade Spaniards on Friday that earlier austerity would be reverted if he won re-election later this year, unveiling a 2016 budget featuring the first spending hikes since he took office. While still tight - the country plans to cut the public deficit by around 15 billion euros ($22 billion) next year - the budget will be boosted by lower debt costs as well as higher tax revenues and reduced payouts for the unemployed resulting from an accelerating economic recovery. This offered new fiscal leeway to build the budget, which was presented two months ahead of the usual schedule so that it can be approved by congress ahead of the national vote due in November or December. Rajoy announced a 1 percent increase in civil servants' salaries, their first hike since 2009, and a 0.25 percent boost to public pensions. He also confirmed that an extra 7.5 billion euros would be transferred to the regions, which are in charge of health and education spending and were forced to implement steep cuts in previous years. That came on top of tax cuts worth 1.5 billion euros announced earlier this month and that targeted the austerity-hit middle-class. "It is indisputable that the situation is changing and that a growing number of people are feeling it," Rajoy told journalists during his traditional mid-year press conference. "The budget that was approved by the government on Friday will set the (economic) recovery on an even stronger footing," he added. Rajoy pledged to implement new tax cuts if he won a new four-year term and said the unprecedented efforts made by Spanish people during the crisis would be met by higher social spending if the economic rebound was not derailed. DOUBTS Spain's economy grew at its fastest rate since 2007 in the second quarter although more than 5 million people are out of work, at 22.4 percent a bigger proportion than any euro zone state except Greece. Rajoy has pledged to put 3 million people back to work in the next three years but the country's independent fiscal authority said on Friday job creation would likely fall below that level. The budget announcement also left the opposition Socialists unimpressed. Together with trade unions, they accused Rajoy earlier this month of using the budget proceedings to run a populist electoral campaign. "The government is using a symbolic budget trick to campaign ahead of the elections on measures which will have limited impact," said Ignacio Fernandez Toxo, the leader of Comisiones Obreras trade union. While economists also say the pace of recovery may flag as the effect of supportive cheap money, falling oil prices and low inflation starts to wear off, Rajoy insisted the main risk ahead was political instability. The ruling People's Party is seen winning the year-end vote with the Socialists coming a close second. But the rise of new leftist and centrist parties has splintered the political scene and could lead to a hung parliament or unstable governments. Rajoy, who holds an absolute majority in parliament, said political stability had been key in fighting off a sovereign bailout at the height of the crisis and in implementing the tough fixes the Spanish economy needed. "If there is no twist and turn, we can enjoy the longest growth period in recent history," he said. "But a government with three of four parties would be bad for Spain." ($1 = 0.9112 euros) (Editing by Jeremy Gaunt)