Spanish Prime Minister Mariano Rajoy announced tax increases and spending cuts totaling 65 billion euros ($80 billion), risking a deepening recession to keep the euro financial crisis at bay.
Rajoy’s fourth austerity package in seven months will raise the sales levy to 21 percent from 18 percent; scrap a tax rebate for home buyers; scale back unemployment benefits and study pension cuts; consolidate local governments and eliminate the year-end bonus for public workers. The budget measures, covering the next two-and-a-half years, are about double those previously announced.
The prime minister addressed Parliament in Madrid today as European officials put the finishing touches to a 100 billion-euro bailout for Spain’s banks. The amendments to the budget come less than two weeks after it went into effect and a day after the European Union loosened Spain’s deficit targets.
“I know that the measures I’ve announced aren’t agreeable,” Rajoy said in his 70-minute speech to lawmakers. “They aren’t agreeable but they are essential. We are in an extraordinarily serious situation.”
Demands by bond markets and European creditors that Rajoy put Spanish finances in order drove him further from campaign promises that helped him win the biggest majority since 1982.
Rajoy, in power since December, opposed raising value-added tax when the previous government increased the rate. He denied in a debate he planned to cut unemployment benefits, which amount to about 30 billion euros a year. His public support has fallen since his victory on Nov. 20, and thousands of miners and their supporters set off fireworks and waved banners in Madrid today after marching to the capital from northern Spain.
“I said I would cut taxes and I’m raising them,” Rajoy said. “But the circumstances have changed and I have to adapt to them.”
Scrapping the mortgage rebate reverses a policy Rajoy implemented in December at his second Cabinet meeting to enact an election promise. At the same time, he raised pensions to meet another pledge. Today he said he’d present parliament’s pension committee with a bill to make benefits more sustainable and address early retirement, Rajoy said.
While irking Spaniards, Rajoy’s efforts to cut the deficit and restore economic growth have failed to convince investors he can stem the surge in public debt. The yield on Spain’s 10-year bond fell 4 basis points to 6.77 percent today. That compares to Germany’s 1.31 percent.
Rajoy also called on the regions to make deeper cuts and said a new law would limit pay for mayors and the services that municipalities can offer. The government will create a mechanism to help regions locked out of markets gain access to financing in return for deeper budget cuts, he said.
Spain’s central government budget deficit swelled to 3.41 percent of gross domestic product in the first five months of the year, approaching the full-year goal of 3.5 percent after the government brought forward transfers to regional administrations and the social-security system, which is struggling under the burden of a 25 percent unemployment rate.
Spain won an extra year this week to bring its deficit within the EU’s 3 percent limit as European finance ministers agreed to loosen the 2012 deficit goal to 6.3 percent of GDP from 5.3 percent. Still, ministers urged Spain to step up budget cuts. EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday “additional measures would have to be taken rather soon.”
Even with the new targets, Spain needs to cut the deficit by 2.6 percent of GDP as the economy shrinks. The deficit overshot last year as the economic slump bit into tax revenue and regions unearthed undeclared bills. The government forecasts a contraction of 1.7 percent this year and Rajoy said today the slump would continue next year.