Spain reveals new budget cuts
Spain unveiled new austerity measures today designed to cut €65 billion from the public deficit by 2014 as violence broke out on the streets of Madrid.
Prime minister Mariano Rajoy, who yielded to EU pressure to try to avoid a full state bailout, announced a 3 percentage point increase in the main rate of VAT on goods and services to 21 per cent and cuts in unemployment benefits and civil service pay. His speech was interrupted by jeers and boos from the opposition.
"These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euros," he told parliament.
Analysts said the draconian savings plan, tearing up several of Mr Rajoy's campaign promises, showed Madrid was already under de facto supervision from Brussels even though it has not requested a sovereign bailout and retains access to bond markets.
Some said the tax increases could exacerbate the recession. Spain won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to €100 billion from the euro zone's bailout fund for its crippled banking sector.
In line with recommendations from the European Commission, Mr Rajoy announced new indirect taxes on energy, plans to privatise ports, airports and rail assets, and a reversal of property tax breaks that his Popular Party had restored last December.
Keeping one election promise, Mr Rajoy did not touch pensions but he said he would discuss with the Socialist opposition a change to the system in line with EU recommendations to link benefits to life expectancy. He also said the tax burden was being shifted from taxes on labour and income to consumption and energy in line with European policy.
In the streets of Madrid, hundreds of coal miners who had staged a long march from northern Spain since June 22nd protested against cuts in mining subsidies they say will put them out of work, as public discontent over austerity measures grows. Violence broke out with reports of protesters being injured by rubber bullets fired by police.
The protesters marched down the city's main business strip, Paseo de la Castellana, to the Industry Ministry, waving banners with slogans like "Rajoy, your future is darker than our coal", singing rowdy songs and chanting: "Yes we can".
There were frequent loud bangs from firecrackers.
With five years of economic stagnation and recession, unemployment at 24.4 per cent and tax revenue falling, Spain is struggling to reduce the deficit after far overshooting its target last year.
The high deficit and weak banks are now at the centre of the euro zone's debt crisis as investors fret that Spain could join Greece, Portugal and Ireland in needing a sovereign bailout.
Madrid's borrowing costs have soared in recent months, with the yield on the 10-year government bond breaching the 7 per cent level regarded as unsustainable in the long run.
That yield fell to 6.81 per cent today.
In Brussels, the European Commission welcomed the new fiscal programme, calling it an important step to ensure this year's fiscal targets are met. In its annual assessment of the Spanish economy released in May the EU executive had recommended most of the measures announced today.