Can Spain's Premier Pass His Budget? Four Possible Scenarios

(Bloomberg) -- After toppling the conservatives from office in a no-confidence vote, Spain’s new Socialist government is facing its biggest test yet: approving a budget.

For the five-month-old administration, securing a spending plan is a test that may determine how long novice Prime Minister Pedro Sanchez can hold off another election. His challenge is to meet a pledge to raise social spending, keep together the disparate coalition that put him into office and find a way around the People’s Party, which controls the Senate.

Can Spain's Premier Pass His Budget? Four Possible Scenarios

Soon after taking office, the government said it wanted to run bigger deficits than the previous administration and targeted 1.8 percent of output for next year, up from 1.3 percent. It’s due to send its draft budget to the European Commission by Oct. 15, but the real hurdle is the Spanish parliament where the Socialists command only a quarter of the seats.

Can Spain's Premier Pass His Budget? Four Possible Scenarios

Facing a veto in the Senate from the conservative PP over fiscal rules, any proposal with looser targets will be a hard sell.

So what happens next? These are the scenarios facing Spain:

1. Sanchez wins approval.

Likelihood: Not very.

The deficit targets must be ratified by both chambers, and the opposition People’s Party controls the Senate. The PP already blocked an attempt to ease the fiscal stance and it’s unlikely to change its position in a new vote. That means the Socialists won’t be able to draft a plan incorporating a wider deficit, and therefore, a softer budgetary adjustment.

2. Revert to the PP deficit target.

Likelihood: It’s tough, but not impossible.

In this scenario, the government would use the targets set out by the PP before it was ousted from office in June.

Can Spain's Premier Pass His Budget? Four Possible Scenarios

But without scope for more borrowing, Sanchez and Economic Minister Nadia Calvino would have to increase taxes to fund extra spending. They’d also need to secure the support of the anti-austerity party Podemos, led by Pablo Iglesias, as well as Catalan nationalists and smaller, regional parties. But the PP would not be able to block the plan in the Senate as long as its own deficit goals remain intact.

3. Adopt the PP’s entire 2018 budget.

Likelihood: Possible, but with longer-term ramifications.

Facing defeat of his spending plan in parliament, Sanchez could simply choose to roll over the existing PP budget. It’s the most straightforward way of getting it through, but politically it would be difficult to justify, as the Socialists already voted against that budget. Selling an about-turn to their supporters -- who expect a rollback of austerity -- would be difficult.

4. The alternative: Sanchez throws in the towel.

If Sanchez judges the political price of his other options is too high, then he could call a snap election and try to get a full mandate for his vision for Spain.

It’s a risk, but it might make sense. Pablo Casado, his PP counterpart, is also new in the job and still settling in, and polls show the Socialists have a slight lead.

PollEldiario (early October)Independiente (Sept. 17-19)CIS (Sept. 1-11)
Socialists27.7%26.5%30.5%
People’s Party26.3%23.4%20.8%
Ciudadanos19.3%22.7%19.6%
Podemos 17.4%16.2%10.5%

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