Country imposes another round of austerity, aiming to shave $79B off budgets

Spain’s government imposed more austerity measures on the beleaguered country Wednesday as it unveiled sales tax hikes and spending cuts aimed at shaving C65 billion ($79.85 billion) off the state budget over the next two and a half years.

MADRID, Spain — Spain’s government imposed more austerity measures on the beleaguered country Wednesday as it unveiled sales tax hikes and spending cuts aimed at shaving C65 billion ($79.85 billion) off the state budget over the next two and a half years.

A day after winning European Union approval for a huge bank bailout and breathing space on its deficit program, Prime Minister Mariano Rajoy warned Parliament that Spain’s future was at stake as it grapples with recession, a bloated deficit and investor wariness of its sovereign debt.

“We are living in a crucial moment which will determine our future and that of our families, that of our youths, of our welfare state,” Rajoy said to catcalls from the opposition socialists and other parties as he revealed the biggest single amount of projected deficit savings in modern Spanish history.

He spoke as thousands of miners stung by a huge cut in government subsidies were joined by protesters to demonstrate outside the Industry Ministry in Madrid. The protests later turned violent with riot police firing rubber bullets on crowds after they were pelted with fireworks and rocks.

The spending cuts, designed to cut C65 billion off state budgets by 2015, include a wage cut for civil servants and members of the national parliament and a new wave of closures at state-owned companies. Spain will also speed up a gradual increase in the retirement age from 65 to 67. They are to be approved officially Friday at a Cabinet meeting.

Spain has had to digest round after round of austerity measures since Rajoy’s conservative government took power in December. Until now, there have been C60 billion ($73.71 billion) in spending cuts and tax hikes by the central government or regional administrations. If you include measures taken by the previous, Socialist government, the number goes up to C75 billion. Now, albeit spread over two-and-a-half years, comes another C65 billion.

“This is the reality. There is no other, and we have to get out of this hole and we have to do it as soon as possible and there is no room for fantasies or off-the cuff improvisations because there is no choice,” Rajoy told Parliament.

The measures are in exchange for the bank bailout of up to C100 billion ($122.85 billion) granted to Spain by the other 16 countries that use the euro and extra time to cut the Spanish budget deficit. Finance ministers approved the bailout program at meetings in Brussels this week and as much as C30 billion could flow to Spain’s banks by the end of the month. The country’s banks are saddled with billions of euros in toxic loans and assets following the collapse of the country’s real estate market. The full amount Spain will seek is not yet known.

Europe’s finance ministers also this week extended Spain’s deadline for achieving a budget deficit of less than 3 per cent of its annual economic output, until 2014. The size of Spain’s economy in 2011 is estimated to have been $1.5 trillion.

The bank aid and the deficit-cutting come at the cost of greater EU supervision of Spain’s finances, both for the government and the banks, even though Rajoy’s government insists it has given up no sovereignty.

“In exchange for the bank bailout agreement, Brussels, the ECB and the IMF have placed Spain and its institutions in a situation of strict monitoring and control,” Spanish newspaper El Pais said in an editorial Wednesday.

The concern among investors and Europe-watchers is that further austerity cuts will push Spain’s economy further into recession in the short term, making it even harder for the government to trim its deficit.

Spain — the fourth-largest economy in the eurozone — has been struggling to keep a lid on its government deficit in the midst of a recession while trying to support its troubled banking industry. There are fears that should Spain need a bailout of its own as did Greece, Ireland and Portugal, the eurozone would struggle to finance it, pushing the region further into recession.

However, said Mark Miller of Capital Economics in London, markets are concentrating on the planned bank bailout, which could get the economy up and running again by providing businesses and households.

So if the bailout works, it should eventually compensate for the bitter cocktail of the new austerity package. “’It is the classic case of short-term pain for longer-term gain,” Miller said.

Wednesday’s increases in sales tax include a 3 percentage point hike on products and services like clothing, cars, cigarettes and telephone services to 21 per cent and a 2 percentage point increase on goods such as public transport fares, processed foods and bar and hotel services to 10 per cent. The sales tax on basic goods like bread, medicine and books stays at 4 per cent.

Other measures outlined Wednesday included:

—C660 million of cuts in government spending beyond the reductions already outlined in the 2012 budget

— wage cuts for civil servants and members of the national parliament

— further closures of state-owned companies

— tax deductions for homeowners to be scrapped

— a 30 per cent cut in the number of town councillors

— slight reduction in unemployment pay, designed to encourage jobless people to seek work more quickly.

— 20 per cent cut in government subsidies to political parties and labour unions.

— possible privatization of ports, railways and airports

In Brussels, spokesman Simon O’Connor said the European Commission, the EU’s executive arm, welcomed the government’s announcement of the new measures as “an important step to ensure that the fiscal targets for this year can be met.”

Financial markets greeted news of the measures. The interest rate on Spain’s benchmark 10-year bond dropped 0.23 per cent to 6.57 per cent, away from the 7 per cent levels it reached earlier this week, while the country’s IBEX stock index closed up 1.17 per cent at 6,805.9.

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