MADRID – Spain announced deep cuts to its central government budget yesterday as it struggles to convince European partners and debt markets it can rein in its budget deficit.
The government said it would make savings of €27 billion for the rest of 2012 from the central government budget, equivalent to about 2.5 per cent of gross domestic product. The figure includes tax rises and spending cuts of about €15 billion announced at the end of December.
The cuts come despite popular resistance – a general strike on Thursday disrupted transport, halted industry and on occasion erupted into violence – and against a grim economic backdrop; Spain is thought to have fallen back into recession in the first quarter and has the highest unemployment rate in the European Union.
“Everyone knows the difficult problem we face in this country, and it calls for special efforts in fiscal consolidation and structural reforms to grow and create employment,” the deputy prime minister, Soraya Saenz de Santamaria, said after the weekly cabinet meeting yesterday.
The government, which swept to power in November with the largest parliamentary majority in 30 years, has already passed labour market and banking sector reforms designed to improve competitiveness and reduce wage costs.
Brussels has agreed to let Prime Minister Mariano Rajoy aim for a 2012 deficit equal to 5.3 per cent of gross domestic product, a less demanding goal than the original 4.4 per cent but a substantial improvement on last year’s 8.5 per cent.
The government said it was aiming for a central government deficit equivalent of 3.5 per cent of GDP, a regional deficit of 1.5 per cent of GDP and a balanced social security budget. The regions announced a deficit of 2.9 per cent of GDP in 2011, meaning they would have to cut around €15 billion to meet the 2012 target.
Details were scarce, with the government due to set the budget before parliament on Tuesday, but some economists are concerned that deep austerity measures could damage already weakened growth and further endanger the deficit targets.
The government said it would slash spending by 16.9 per cent across the ministries, with spending at the foreign ministry cut by more than half, and the industry, energy and tourism ministry taking a cut of more than 30 per cent.
Total cuts of more than €42 billion could be tough for an economy struggling to grow, economists warn. “This is as austere as it gets. It’s a tightening of fiscal policy until the pips squeak. There can be no doubting the government’s willingness to curb Spain’s excessive budget deficits,” said Nicholas Spiro at Spiro Sovereign Strategy. – (Reuters)