Spain's Prime Minister Rejects Economic Advice From IMF,

SPAIN was basking in the spotlight as host of the joint annual meeting of the International Monetary Fund (IMF) and World Bank until the house guests sharply criticized the country's economic policy.

Last week, IMF officials called Spain's generous public pension program ``untenable'' and urged that employers be given a freer hand to fire workers. The comments rocked a country just emerging from its worst recession in 30 years and suffering from Western Europe's highest unemployment rate at 24 percent.

``I don't agree when someone - from a technocratic point of view - tells me how to reduce the deficit,'' shot back Socialist Prime Minister Felipe Gonzalez. ``Where and how to reduce the deficit is a political option.''

By week's end, IMF Director General Michel Camdessus softened the punch. He said the ``viability'' of pension systems was a problem throughout Europe and urged Spain to deregulate its labor market so that laying off workers would be, at least, easier.

Yet the sparring match during the Oct. 4-6 IMF-World Bank meeting is unlikely to radically shift Spanish Socialist Workers Party policy or derail the economic recovery the government expects will produce 2.8 percent real growth next year.

Mr. Gonzalez has won four consecutive terms since 1982 while making hefty public payments for pensions, health care, unemployment, and education, and gradually liberalizing a market protected during General Francisco Franco's rule.

Gonzalez has clung to social-welfare policies, despite the recession that hit hard after the 1992 Barcelona Summer Olympic games. He also has been trying to cut the budget deficit to 3 percent of gross domestic product by 1997 so that Spain can meet the European Union's requirements for monetary union.

Social welfare programs account for just over one-half of the government's proposed 1995 budget of $231 billion. Gonzalez's minority government expects to pass the budget with the support of the Barcelona-based Catalan Socialist Party, whose 17 seats in parliament provide the margin for a majority. The 1995 budget won't be ``austere,'' says Carmen Alcaide, chief economist at Banco Bilbao Vizcaya, ``because retirees and the unemployed represent a lot of votes'' in next May's regional and local elections.

But Ms. Alcaide says she is reassured by the government's commitment to stay within the spending limits of the 1994 budget and to tame the public deficit - targeted at 5 percent of gross national product this year.

Spain's economic recovery started this year with a surge in exports, boosted by a 30 percent devaluation in the peseta between late 1992 and mid-1993. The economy's driving force in 1995 is expected to be internal consumption and investment stimulated by the budget's proposed reductions in income tax and social security payments.

The government is already trying to induce consumption among the 39 million Spaniards. Last month, it unveiled plans to pay $700 to those who trade in a car older than seven years and a similar incentive program to encourage the purchase of trucks and vans. Yet the 1995 budget also would increase value-added taxes (VAT) by 1 percent, raising speculation that inflation next year could exceed the predicted 3.5 percent and dampen the recovery.

Even if the economy creates the expected 200,000 jobs next year, the government predicts about one-quarter of Spain's work force will still be jobless. Yet social discontent has been minimal, partly because unemployment benefits start at $414 a month per individual. Unreported part-time jobs also help keep food on tables, economists say.