Spain's ruling Socialists and the opposition center-right Popular Party agreed on Friday to put a constitutional limit on public debt, in an effort to contain its debt crisis. The government also announced reform measures to combat unemployment of over 20 percent.

Starting in 2020, the long-term national deficit cannot exceed 0.4 percent of gross domestic product (GDP). The threshold can, however, be exceeded in times of natural disaster, a recession or other, extraordinary circumstances. The federal government will have to stick to a debt ceiling of 0.26 percent of GDP, the largely autonomous regions to 0.16 percent of GDP.

"The constitution will take in the principle of long-term budget stability so that Spain does not incur a debt that ends up seriously mortgaging our future," Socialist Party Campaign Chief Elena Valenciano said.

The debt ceiling is designed to "boost confidence in the stability of the Spanish economy over the medium and long term," the two parties said. The bill will have to be signed into law by July 2012.

'Essential wiggle room'

Market reaction was muted though, the euro rose briefly against the US dollar on the news, but Spanish bond yields were little changed on Friday afternoon.

Spain wants to enforce long-term fiscal discipline

Alfredo Perez Rubalcaba, the Socialist candidate for prime minister in Spain's November 20 general election, praised the deal for leaving "essential wiggle room," as it allows for revisions of the ceiling in 2015 and 2018. But some market commentators criticized that flexibility, saying it leaves too much room for exceptions.

Still reeling from two years of recession, Spain is trying to reduce its public deficit to 6 percent from 9.2 percent of GDP by the end of the year, before bringing it down to 3 percent of GDP by 2013 - in line with the EU Growth and Stability Pact.

But the government said on Friday its growth forecast of 1.3 percent for 2011 was in doubt, after the latest GDP figures showed that the economy expanded by just 0.2 percent in the second quarter, fueling fears of a renewed recession.

Spain is walking a tightrope several eurozone countries are familiar with - cutting spending to contain the deficit, without choking off growth.

Fighting unemployment

The government also announced measures on Friday to combat unemployment of nearly 21 percent. Under the plans, temporary workers will not have to be made permanent after two years of continuous employment, to give employers greater flexibility and, ultimately keep people in work, even if it is on short-term contracts.

Those who are jobless and undergoing training will see their benefits extended, to the tune of 400 euros ($580) a month.

Sales tax on properties will be cut to 4 from 8 percent to reduce the country's vast stock of unsold houses built during the real estate boom that, eventually, helped trigger the recession.

The country's health services will be encouraged to prescribe more generic drugs to cut down on expensive brand-name medicine.

Author: Nicole Goebel (Reuters, AP, AFP)

Editor: Rob Turner