Spain hikes tax, cuts spending to shave $101b

Wage cut for MPs and civil servants; more state-run firms face closure

ASSOCIATED PRESS, 12 Jul 2012

MADRID - Spain's government imposed further austerity on the country as it unveiled sales tax hikes and spending cuts aimed at shaving €65 billion (S$101 billion) off the state budget over the next 21/2 years.

A day after winning European Union approval for a huge bank bailout and breathing space on its deficit programme, 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 youth, of our welfare state,' said Mr Rajoy.

'This is the reality. There is no other, and we have to get out of this hole. 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 of state budgets by 2015, include a wage cut for civil servants and Members of Parliament, and a new wave of closures of 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 granted to Spain by the other 16 countries that use the euro.

Finance ministers approved the bailout programme at meetings in Brussels this week and as much as €30 billion 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.

Spain, the fourth-largest economy in the euro zone, has been struggling to keep a lid on its government deficit amid a recession while trying to support its troubled banking industry.

There are fears that should Spain need a bailout of its own, the euro zone would struggle to finance it, pushing the region further into recession.

Blaming the previous Socialist government for the legacy of an 8.9 per cent deficit last year, Mr Rajoy said: 'The excesses of the past must be paid in the present.'

Highlighting the need to trim the civil service, he said while nearly three 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.

The increases in sales tax included a 3 percentage point hike on products and services like clothing, cars, cigarettes and telephone services to 21 per cent and a 2 percentage point increase on goods such as public transport fares, processed foods and bar and hotel services to 10 per cent.

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