Spanish Government Unveils Nearly $80 Billion Austerity Plan

By CIARAN GILES and DANIEL WOOLLS

MADRID -- Spain's government imposed further austerity on the country Wednesday as it unveiled sales tax hikes and spending cuts aimed at shaving 65 billion euros ($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," said Rajoy.

"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."

The spending cuts, designed to cut 65 billion euros of 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.

The measures are in exchange for the bank bailout of up to 100 billion euros ($122.85 billion) granted to Spain by the other 16 countries that use the euro. Finance ministers approved the bailout program at meetings in Brussels this week and as much as 30 billion euros 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 goal is to strengthen the banks' balance sheets against further economic shocks so they can start lending to businesses and families. 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% of its annual economic output, until 2014. The size of Spain's economy in 2011 is estimated to have been $1.5 trillion.

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, the eurozone would struggle to finance it, pushing the region further into recession.

The jobless rate in Spain is nearly 25% and the forecast is for the economy to shrink 1.7% this year. The country is mired in its second recession in three years. The concern among investors and Europe-watchers is that further austerity cuts will push Spain's economy further into recession, making it even harder for the government to trim its deficit.

Blaming the previous Socialist government for the legacy of 8.9% deficit in 2011, Rajoy said, "The excesses of the past must be paid in the present."

Highlighting the need to trim the civil service, Rajoy said that while nearly 3 million private-sector jobs had been lost since 2007, public sector employment numbers had increased by 289,000.

"I know the measures are not pleasant but they are imperative," he said.

"In the current situation in Spain, it's not possible to create employment or grow economically. Never before have we had two recessions so deep and so close together -- it's something none of us here present have ever lived through -- and the indicators suggest the recession will continue next year," Rajoy added.

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% and a 2 percentage point increase on goods such as public transport fares, processed foods and bar and hotel services to 10%. The sales tax on basic goods like bread, medicine and books stays at 4%.

The increases were widely expected but go against campaign pledges made by Rajoy before he was elected in November and since he came to power.

Other measures outlined Wednesday included:

  • 660 million euros 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% cut in the number of town councilors
  • changes to unemployment benefits designed to encourage jobless people to seek work quickly.
  • 20% cut in government subsidies to political parties and labor unions.

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18 Comments

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bhawkes328

THE POOR BLIND FOLKS JUST TO REFUSE TO CALL THIS WORLD MESS WHAT IT IS.... ITS A DEPRESSION FOLKS , WAKE UP......

July 13 2012 at 9:53 AM Report abuse rate up rate down Reply
stylz2k69

They also should cut on their SIESTA TIME. Business open at 9 or 10 AM and close at 2PM for siesta, they reopen at 5 or 6PM and close at 9PM. Many except restaurants and bars dont open at all on Saturdays and Sundays. Too much debt and No production. I do however like Siesta myself but on tough times you have to sacrifice something. They also dont have much property taxes like USA so it wont hurt much to eliminate their deduction.

July 12 2012 at 2:30 AM Report abuse +1 rate up rate down Reply
OCgirl

"The spending cuts, designed to cut 65 billion euros of 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."

660 million euros 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% cut in the number of town councilors
changes to unemployment benefits designed to encourage jobless people to seek work quickly.
20% cut in government subsidies to political parties and labor unions.

This seems to be a common sense way to attempt to fix their problem. Why is this s*it so difficult for Americans to come up with?

July 11 2012 at 8:54 PM Report abuse rate up rate down Reply
MERLIN

i am tired of hearing about other countries, it is time we fix the problems in the USA

July 11 2012 at 7:30 PM Report abuse +1 rate up rate down Reply
phasejump

Where in the last 4-5 years has severe austerity worked? NOWHERE!!! Why do we continue with this garbage economic philosophy

July 11 2012 at 3:00 PM Report abuse +2 rate up rate down Reply
1 reply to phasejump's comment
OCgirl

I'm pretty sure we haven't tried his plan here at all. Well maybe in WI, but what about the rest of the country?

July 11 2012 at 8:55 PM Report abuse -1 rate up rate down Reply
Koz

Spain a former socialist government downheading for the toilet. The same will happen here unless with rid ourselves of obamas thinking. You can give money away, someone must pay and I am one of many that is tired of paying.

July 11 2012 at 1:25 PM Report abuse +4 rate up rate down Reply
3 replies to Koz's comment
Welcome Garners

Anybody out there have REAL figures on how much the US FED GOV has grown while private industry is laying people off? We can't all work for the gov't and survive as a nation. Keynesian economics IS THE PROBLEM...NOT the solution.

July 11 2012 at 1:23 PM Report abuse +4 rate up rate down Reply
1 reply to Welcome Garners's comment
phasejump

That is completely untrue in every way

July 11 2012 at 3:01 PM Report abuse -3 rate up rate down Reply
Welcome Garners

Keynesian economics IS THE PROBLEM!

July 11 2012 at 1:21 PM Report abuse +1 rate up rate down Reply
bigern1860

and our Present Government pins hopes on massive spending.

July 11 2012 at 12:35 PM Report abuse +1 rate up rate down Reply
craigmrfrn

Who ever thought unifying these currencies was a good idea? I just couldn't see how it was going to work. Totally crazy.

July 11 2012 at 12:17 PM Report abuse +2 rate up rate down Reply