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.
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 euro zone's biggest deficits was made harder by weak 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 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 euro zone'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.
Economy Minister Luis de Guindos reiterated that the government was still analyzing potential conditions for aid.
Uncertainty over Spain's ability to control its economy, and especially the regional governments which make up around half of total spending, has been further rattled by rising demands for independence in the wealthy northeastern state of Catalonia.
The deputy prime minister said on Thursday the region was not permitted to hold a referendum on independence before consulting with the rest of the country.
ECONOMIC REFORM TIMETABLE
Saenz de Santamaria said the government would detail 43 new laws to reform the economy over the next six months, including a reform of the pension system, one of the state's most expensive costs, before the end of the year.
Spain's detailed timetable for economic reforms goes beyond what the European Commission has asked of Spain and is an ambitious step forward, the EU's top economic official said on Thursday in response to the government announcements.
"The reforms are clearly targeted at some of the most pressing policy challenges," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
Market reaction was cautious.
"The first impression (of the announcements) are 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".
De Guindos' statement that the 2012 budget deficit target would be met this year due to a solid increase in revenues will also be viewed with suspicion with many economists expecting the government to miss its deficit target of 6.3 percent of GDP.
The measures continue to heap pressure on the crisis-weary population and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police are given the green light to use force to disperse crowds.
A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes after a burst housing bubble in 2008 and plummeting consumer and business sentiment tipped the country into a four-year economic slump.
The prime minister's image, both at home and abroad, has also deteriorated rapidly since his party won an absolute parliamentary majority last November.
Newspaper pictures of the conservative Rajoy smoking a cigar on Sixth Avenue in New York while protesters gathered in Madrid fuelled criticism of his detached attitude toward Spain's mounting problems.