Spain vows cuts, higher taxes to fix deficit blowout

30th December 2011, Comments 0 comments

Spain's new right-leaning government announced a 2011 deficit blowout Friday as it unveiled spending cuts and taxes increases to claw back 15.1 billion euros ($19.6 billion) in 2012.

Freshly installed after beating the Socialists in November 20 elections, Prime Minister Mariano Rajoy's administration said it had found the books in a bad state.

Spain's closely-watched public deficit would be equal to about eight percent of gross domestic product in 2011, veering well beyond the official six-percent goal, it said.

"It is a much higher figure than had been communicated and promised by the previous government," Rajoy's powerful deputy, Soraya Saenz de Santamaria, told a news conference after a cabinet meeting.

"We are facing an extraordinary, unexpected situation, which will force us to take extraordinary and unexpected measures," she said, as the Popular Party government had to break the news of higher taxes.

These austerity measures were just the "beginning of the beginning", she warned.

The government froze public sector wages and new hiring, angering unions, but it let pensions rise by one percent in 2012 and it extended minimum payments to the jobless whose benefits run out.

Budget cuts amounted to 8.9 billion euros, it said, including lopping 1.6 billion euros off public works, and another a billion euros each off the foreign, economics, regional and industry budgets.

At the same time, the government pushed up taxes including on on salaries and on capital income -- hurting a core part of its constituency -- to bring in another 6.275 billion euros.

Taken together, the spending cuts and higher taxes amount to 15.1 billion euros.

Rajoy has vowed to meet Spain's target of reducing the public deficit to 4.4 percent of gross domestic product in 2012, come what may.

He had predicted 16.5 billion euros in austerity measures for next year, rising by 10 billion euros for each percentage point of deficit slippage: a calculation that could extend the total to nearly 40 billion euros.

His deputy said the government would try to protect the most vulnerable from the impact of the measures.

"This is a difficult moment but with these measures and these structural reforms, Spain will be able to emerge from the crisis and will be able to create employment," Santamaria promised.

Public sector workers, who took a five-percent pay cut in 2010 and a pay freeze in 2011, would have their wages frozen again in 2012, the deputy premier said.

The government imposed a public sector hiring freeze, too, except for basic services such as education, health and security forces.

"It is a new attack on public sector employees' working conditions," said the public sector workers' main union, the CSI-F, complaining that they were being made to take the blame for the spending overshoot.

There was a small dose of good news for the near five million unemployed, who represent an estimated 21.5 percent of the workforce.

The government extended a 400-euro-a-month payment for people whose unemployment benefits have run out. The payments had been due to expire in February.

A full budget plan is to be unveiled in March when the 2011 public deficit is known, the government has said.

Ministers have promised to clean up the financial sector, bogged down with dodgy property assets.

The government plans to present labour market reform plans on January 7. Rajoy has asked businesses and unions to agree on changes to the collective bargaining system and hiring laws.

© 2011 AFP

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