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Home News Spanish government decides new round of cuts

Spanish government decides new round of cuts

Published on 05/01/2012

Spain's right-leaning government met Thursday to decide a new round of reforms to slash spending as it struggled to meet 2012 deficit-cutting targets.

Just two weeks after taking power, Prime Minister Mariano Rajoy met with his ministers to cut costs: this time reportedly seeking to cut the number of debt-laden state-owned enterprises and fight tax fraud.

Last week, the government announced budget cuts amounting to 8.9 billion euros, and tax increases, including on salaries and on capital income, to bring in another 6.275 billion euros.

That, as Rajoy’s deputy Soraya Saenz de Santamaria warned, was just “the beginning of the beginning”.

Ministers pored over a list of 400 national state-owned enterprises with an accumulated debt of 32 billion euros and another 2,600 regional organisation with debts of 15 billion euros, said business daily Cinco Dias.

The government plans to axe some, merge some, and sell off others, the newspaper said.

Rajoy’s team is taking quick action because it has vowed to meet an increasingly difficult target of slashing the deficit to 4.4 percent of gross domestic product in 2012, come what may.

The government has acknowledged Spain will miss its goal of reducing the public deficit to 6.0 percent of GDP in 2011 from 9.3 percent the year before. The 2011 deficit may even top 8.0 percent, ministers say.

The Popular Party government says that overshoot could force it to take another 20 billion euros in austerity measures for 2012, originally estimated at 16.5 billion euros.

Economy Minister Luis de Guindos spooked financial markets Thursday in an interview with the Financial Times in which he warned of large provisions for banks’ bad loans.

“If you take international valuations as in the case of Ireland, at the most you are talking about the need for 50 billion euros of extra provisions (for Spanish banks),” De Guindos said.

“In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years.”

The banks loaned huge amounts of money during the property bubble, which imploded in 2008 leaving them holding piles of doubtful loans and devalued real estate assets.

The property crash also destroyed millions of jobs, leaving Spain with an unemployment rate of 21.5 percent, and sent the economy into a slump from which it has yet to recover.

The European Banking Authority said in December that Spain’s five biggest banks required an extra 26 billion euros in capitalisation.

De Guindos also told the paper he would impose strict budget discipline on the 17 powerful autonomous regions, which are responsible for health and education services.

A new law in March would introduce tough budget controls, he said.

“You will have a priori controls. Before approving the budget, ministers will need the green light from the central government,” De Guindos said.

In a first reaction, Catalonia’s regional government spokesman Francesc Homs said the plan was “unacceptable” and “intolerable”.

Moody’s Investors Service warned last month that the regions will miss deficit-cutting targets for 2011 and could imperil Spanish efforts to curb the national deficit in 2012.