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Spain swings budget axe to save 27 bn euros

PublishDate:2012-06-11 Source: Author:

Spain unveiled on Friday 27 billion euros ($36 billion) worth of spending cuts and tax hikes as it sought to reassure jittery markets it will get its finances under control.

Government ministries will see their budgets slashed by an average of around 17 percent according to the plan, which also raises taxes on tobacco sales and closes tax loopholes and rebates for large companies.

Public workers will have their wages frozen, but pensions and jobless benefits were spared amid rising public anger at the dire economic situation where unemployment has soared to nearly 23 percent.

"We are in an extreme situation. Our top priority is to clean up the public accounts," Deputy Prime Minister Soraya Saenz de Santamaria said after a weekly cabinet meeting that approved the draft spending plan for this year.

Spain -- which overshot its public deficit target last year -- is racing to slash its public deficit to reassure markets that it will not follow Greece, Ireland and Portugal in requesting an international bailout.

The government's borrowing costs, which had been declining in recent months, have begun to creep up again towards unsustainable levels.

As the government unveiled its budget, eurozone finance ministers meeting in Copenhagen agreed to boost the size of a financial firewall for the eurozone to around 800 billion euros.

The firewall is intended to to calm markets by ensuring adequate funds would be available if a larger eurozone country like Spain or Italy suffered debt strains.

Full details of the budget will be revealed on Tuesday when it goes to parliament, where the Popular Party government has an outright majority after winning a November general election in a landslide.

Budget Minister Cristobal Montoro said it was the most austere budget since Spain returned to democracy following the death of General Francisco Franco in 1975.

"We are taking extraordinary measures because the situation is extraordinary," he said, adding that thanks to this budget Spain would "reliably" meet its deficit target for this year.

Under an agreement with European authorities, the government must bring down the public deficit to the equivalent of 5.3 percent of economic output this year from 8.51 percent last year.

The latest austerity measures come on top of 8.9 billion euros in spending cuts and 6.3 billion euros in tax increases already announced this year.

But meeting the deficit target is complicated by the fact that Spain is heading back into recession, with the government predicting the economy will contract by 1.7 percent this year.

"To meet the overall deficit target, more measures may need to be announced at regional and local level," said Christian Schulz, senior economist at Berenberg Bank.

Jose Carlos Diez, analyst at Intermoney brokerage, said other countries had shown that reducing the deficit in a recession is difficult because it cuts government receipts and raises expenses for unemployment benefits.

"Suddenly you are rowing against the current, with a capacity to row but in the end you tire out," he warned. "Spain needs more time but Brussels does not seem disposed to give it."

While the Spanish government plans to freeze public sector workers' salaries -- which were cut by the previous Socialist government -- it ruled out raising sales tax and said pensions would still be raised and jobless benefits maintained.

"We are in effect putting in place a serious budget adjustment, which at the same time tries to do the least amount of harm to economic activity and preserves social rights," said Montoro.

The government unveiled its austerity budget for 2012 a day after a general strike against spending cuts and labour market reforms that make it easier to cut jobs, when violence flared at protests in some cities.

Hundreds of thousands of protesters swamped Spain's streets on Thursday to back the strike, marred by clashes in Barcelona where youths set fire to bins and a Starbucks coffee shop.

Unions said nearly a million people took part in Madrid alone to denounce labour reforms, spending cuts and soaring unemployment in a country mired in recession. The interior ministry put turnout in Madrid at just 85,000.

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