Spain reveals deficit over-run, enacts 8.9 bn euros in cuts

Spain’s new right-leaning government slashed 8.9 billion euros ($11.5 billion) in costs Friday and promised even deeper cuts in the New Year, blaming a deficit blowout in 2011.

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 and the cuts would have to run deep.

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.

The 2011 public deficit was “much higher” than had been forecast by the last government, Rajoy’s powerful deputy, Soraya Saenz de Santamaria, told a news conference after a weekly cabinet meeting.

Spain’s deficit, closely watched by financial markets, would be equal to about eight percent of gross domestic product in 2011, veering well beyond the official 6.0-percent goal, she said.

“It is a much higher figure than had been communicated and promised by the previous government,” she said.

Rajoy, who leads the conservative Popular Party, 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 savings for the year, and an extra 10 billion euros for each percentage point of deficit slippage: a calculation that could extend the 2012 cuts to nearly 40 billion euros.

“We are facing an extraordinary, unexpected situation, which will force us to take extraordinary and unexpected measures,” said Santamaria, describing these cuts at the “beginning of the beginning”.

She 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,” the minister 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 clamped down 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.

“Public sector workers have become the whipping boy again to help the state deficit,” said a statement by the General Workers Union.

The administration announced a temporary tax rise and ministerial budget cuts of 1.6 billion euros for public works, 1.1 billion euros for industry and 1.1 billion euros for economy.

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 says.

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

The government plans to present a labour market reform on January 7. Rajoy has asked business and union leaders to agree on changes to the collective bargaining system, hiring laws and other employment issues.