* PM Rajoy needs backing from opposition for bill
* Edging towards deal with some rivals, ups social spend
* Budget details expected around 1200 GMT
By Sarah White
MADRID, March 31 Spain's minority government is
expected to offer public sector pay rises and more social
spending in its much-delayed draft budget for 2017 on Friday,
steering further away from years of austerity as it tries to get
the opposition to back the bill.
The budget is a major test of conservative Prime Minister
Mariano Rajoy's chances of seeing out his four year mandate,
after he was reinstated for a second term last October with the
weakest grip on parliament in modern Spanish history.
The draft bill will be passed by Rajoy's cabinet eight
months behind schedule - after two inconclusive elections left a
power vacuum in Spain for over 10 months last year - and will
then be subject to tweaks in parliament and a vote.
A brightening economic outlook over the past two months,
which could lead Spanish growth to slow less than many initially
expected this year, and improving public finances have helped
give Rajoy leeway on the budget. His chances of passing it have
increased after securing backing from the fourth biggest party
and as he inches closer to a deal with some regional forces.
While the government's overall spending will not increase in
2017 and Rajoy had begun to step away from austerity measures in
the run-up to a 2015 election, ministers have already signalled
a further move away from those policies in recent days.
The government had flagged 4.2 billion euros
of infrastructure spending in the Catalonia region for instance
and a 1 percent pay rise for civil servants across the country.
It has agreed to lower value-added tax on theatre and
concert entries, after Rajoy's tax hikes in the arts sector in
2012 proved deeply unpopular.
Budget Minister Cristobal Montoro said this week that, as
part of the budget bill, the government would grant some 350,000
permanent contracts to temporary workers in the public sector,
including 130,000 in health care.
Spain's public deficit fell within targets agreed with the
European Union for the first time since the global financial
crisis in 2016.
It needs to shrink to 3.1 percent of output in 2017 from
4.54 percent last year, but the government is relying on strong
growth this year rather than the spending cuts that
characterised Rajoy's first term to shrink it further.
Job creation and export growth was more robust than many
economists had expected in January and February, and some
believe output may now expand at a higher rate than the 2.5
percent official forecast.
Data is still mixed, however, and retail sales fell in
January for the first time in almost two and half months as
inflation spiked. They were flat in February, data on Friday
Rajoy's chances of getting the budget through look a lot
more promising than a few months ago.
Two opposition parties, the centre-left Socialists and
anti-austerity Podemos ("We Can"), have already said they will
vote against it.
But the government has clinched a deal with the
fourth-largest force in parliament, centrists Ciudadanos
("Citizens"), to back the bill after agreeing to commit 4.1
billion euros ($4.38 billion) on social spending and promising
not to raise taxes.
Rajoy is also wooing regional parties in the Canary Islands
and Basque Country to get him across the line with the majority
His People's Party (PP) has 137 of parliament's 350 seats
and 176 votes are required to pass the budget into law.
($1 = 0.9359 euros)
(Additional reporting by Paul Day; Editing by Alison Williams)