Departmental budgets were slashed by 8.9% for next year and public sector wages frozen for a third year as Prime Minister Mariano Rajoy battles to trim one of the eurozone's biggest deficits.
“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.
Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because European Union paymaster Germany insists Spain doesn't need help.
The budget goes to parliament on Saturday and debates could last weeks. The country's 17 autonomous regions still must present budgets and find an additional €5 billion in adjustments to meet overall public deficit reduction goals.
Catalan demands for independence rocking ship
Madrid is talking to EU authorities about the terms of a possible aid package that would trigger a European Central Bank bond-buying programme and ease Spain's unsustainable funding costs.
Uncertainty over Spain's ability to control spending in regional governments -- which account for half of all public spending and could threaten the deficit goal -- has increased due to the Catalan demands for independence.
The autonomous region's parliament voted on Thursday to hold a referendum on independence, but Saenz de Santamaria said the region must consult the rest of the country first.
Pensions, earmarked by the European Commission as a key area for reform, will rise by 1% next year, and by the end of this year the government will announce a reform to restrict early retirement and to review sustainability of the pension system which could open the door to accelerating an increase in retirement age.
The detailed timetable for economic reforms goes beyond what the European Commission has required 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.
Tensions rising on streets of Spanish cities
Spending cuts continue to heap pressure on Spaniards and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police use force to disperse crowds.
A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes since a housing bubble burst 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 deteriorated rapidly since his party won an absolute parliamentary majority last November.
Newspaper pictures of Rajoy enjoying a cigar on Sixth Avenue in New York on Wednesday while protesters gathered in Madrid fuelled criticism of his detached attitude toward Spain's mounting problems.
