The draft budget for 2014 approved by the cabinet on September 30 sets aside €48.2 million ($65.4 million) for the Institute of Cinematography and Audiovisual Arts, the state body which finances films, a 12.4 percent drop from the previous year.
The institute already saw its budget plunge by 22.6 percent in 2013 from 2012.
"For the government, cinema is a priority for culture in our country. But it needs a change in the structure of its financing," secretary of state for culture, Jose Maria Lassalle, told a parliamentary committee.
Spain has produced a number of internationally acclaimed directors such as Oscar-winner Pedro Almódovar and has gained a reputation for clever, low-budget thrillers, art house films and psychological horror movies.
Critics of the government policy charge that these types of films will disappear as state subsidies are cut because producers will be more likely to seek guaranteed box office returns.
"Since 2011 we have seen the budget for culture in general fall by 35 percent, or €380 million, and by 58 percent for cinema alone," said José Andrés Torres Mora, a lawmaker with the main opposition Socialist Party.
The cuts to film subsidies come as the sector is reeling from a drop in cinema attendance in a country where one in four people is out of work.
The number of cinemas in Spain dropped to 841 in 2012 from 1,223 a decade earlier, according to culture ministry figures.
The number of people who bought tickets for film dropped to 94.2 million in 2012 from 140.7 million in 2002 and is expected to dip further this year.
The rise in the value added tax that is slapped on movie tickets to 21 percent last year from 8.0 percent contributed to the decline in movie attendance, film sector officials say.
Budget Minister Cristobal Montoro rejected the accusation that government austerity measures were to blame for the difficulties faced by the film sector.
"The problems cinema is having are not only linked to subsidies, they are related to the quality of the movies that are made, their commercialisation and many other things," Montoro said during an interview with news radio Cadena Ser.