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.

"This is a clear demonstration of the macroeconomic conditionality that we had to accept in exchange for the banking aid and in exchange for more time to cut the deficit to 3 per cent," said Santiago Sanchez Guiu, economist at the Carlos III university in Madrid.EU finance ministers agreed yesterday to give Spain an extra year until 2014 to bring the public deficit down to 3 per cent of gross domestic product and relaxed this year's goal to 6.3 per cent.

However, a Commission document said even the easier target would be difficult to reach. The latest measures completely overhauled Mr Rajoy's previous budget plan, in which the central government and 17 autonomous regions had put in place some €48 billion in savings for 2012, insufficient to bring the deficit into line.

Mr Rajoy announced reforms to city hall governments, shutdowns of public companies, reduced benefits for civil servants, budget cuts for political parties and labour unions.The main civil service trade union responded by announcing work stoppages in July and a possible strike in September.

Small groups of public workers protested outside parliament and the Popular Party's headquarters, chanting: "This is not a crisis, it's a rip-off."

The prime minister, who had pledged not to raise VAT, said he now had no choice. The main rate will rise to 21 from 18 per cent and the reduced rate to 10 from 8 per cent in a step that could further depress consumer spending. A government source told Reuters the increase would take effect on August 1st.

"We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes," Mr Rajoy said. "That is the reality. We have to get out of this mess and we have to do it as soon as possible."

The protesting coal miners, who had walked some 400km

from the Asturias region over 44 days, were joined by thousands of supporters, including labour activists, after receiving a hero's welcome on marching into the capital during the night with lamps lit on their helmets.

Public anger over spending cuts has risen as school and hospital budgets have been hit. Manuel Corte, a security worker from Asturias who joined the miners' demonstration, called the new cuts a "disaster".

"I thought all the previous cuts on medicines and pensioners and on education were the worst possible thing but now..." he said.With more than half of young Spaniards without a job, the government said unemployment benefit would fall to 50 per cent of previous earnings from 60 per cent after the first six months on the dole.

Mr Rajoy said the measure was intended to increase the incentive to look for work.