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More economic pain in Spain as government unveils new cuts

July 11, 2012 |  8:17 am

This post has been corrected. See the note below for details.

PAMPLONA, Spain -– Declaring Spain’s deep recession a new “reality,” Prime Minister Mariano Rajoy announced nearly $80 billion worth of spending cuts and sales tax hikes Wednesday to try to pull his government out of the red.

The new austerity measures come a day after Rajoy won European Union approval for an up to $125-billion bailout for Spanish banks, weighed down by bad real-estate loans from the country's housing bubble.

EU finance ministers also agreed to give Spain an extra year, until 2014, to meet its deficit-cutting targets. Madrid’s budget shortfall last year was 8.9% of gross domestic product, nearly three times what EU rules allow.

“We have to get out of this hole, and we have to do it as soon as possible. There is no room for fantasies," Rajoy told the Spanish parliament. "This is the reality. There is no other.”

This is the fourth round of austerity measures Rajoy’s ruling conservatives have introduced since sweeping to power in elections in November.

At least one of his tax hikes amounts to a broken campaign promise. The value-added tax, essentially a sales tax, on items such as clothes, cars and tobacco will rise from 18% to 21%. Rajoy’s Popular Party had vowed not to raise the rate to avoid dampening already-weak consumer spending.

“The circumstances have changed, and I have to adapt myself to them,” Rajoy said in a speech that won applause from his fellow conservatives but boos from the opposition.

Public employees will lose some vacation days and their holiday bonuses, which amount to about 7% of their annual pay, and 30% of local town councilors will lose their jobs. Rajoy said state industries will be privatized or closed. Public funding for unions and political parties will be cut by 20%. A tax credit for new home buyers, introduced just seven months ago, was scrapped.

"These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euros," Rajoy said, adding: "We are living in a crucial moment which will determine our future and that of our families, that of our youth, of our welfare state."

Outside on the streets of Madrid, police fired rubber bullets at coal miners protesting a 63% cut to government subsidies, which they fear will kill their industry.

Thousands of miners, on strike since May, occupied Madrid's main plaza overnight. Hundreds had marched about 250 miles from mines across northern Spain to reach the capital. Others locked themselves underground in their mines, with provisions, to protest government cuts.

Spain has Europe’s highest unemployment rate, with one in four workers idle, yet unemployment benefits are also to be reduced. Rajoy said that a type of job-seekers’ loan that kicks in once regular unemployment benefits are exhausted would be cut for recipients who have been on it for more than six months.

For the record, 11:47 a.m. July 11: A previous version of this story incorrectly stated that a job-seekers' loan program would be cut for recipients who have been on it for more than seven months. The cut will affect those who have been on the program for more than six months.


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Photo: Flares are thrown at riot police outside the Industry Ministry in Madrid during a demonstration Wednesday by Spanish coal miners opposed to subsidy cuts. Credit: Denis Doyle / Getty Images