Spain’s Rajoy Announces More Cuts, Tax Increases

The Spanish leader unveils “necessary” austerity measures to bring spending in line with revenue.

Prime Minister Mariano Rajoy of Spain announced new austerity measures on Wednesday in order to reduce his government’s shortfall by €65 billion in 2014.

Rajoy proposed a three point hike in consumption taxes and a reversal of property tax breaks that his conservative party restored in December when it replaced a socialist administration. He also announced cuts in unemployment benefits and public-sector pay as well as privatization plans for airports, harbors and rail assets.

The conservative, who was interrupted several times by opposition lawmakers during his speech in parliament, admitted, “These measures are not pleasant but they are necessary. Our public spending exceeds our income by tens of billions of euros.”

In keeping one election promise, Rajoy did not touch pensions. He had also vowed no further sales tax increases however. The socialists increased the rate from 16 to 18 percent. Rajoy announced a raise to 21 percent.

Deeper public spending cuts are needed to balance Spain’s budget in the short term. The socialists previously increased consumption and income tax rates to mend the deficit but even so, the current target of 5.3 percent of gross domestic product will be difficult to achieve.

Last year, the deficit ended at 8.9 percent. Government spending was cut that year by 3.6 percent after 1 percent in cuts in 2010.

After the Spanish housing market collapsed in 2008, government spending as a share of GDP reached a record high of 46.3 percent. The ruling socialists attempted a Keynesian stimulus policy that did little to shift employment from construction or create jobs in it. More than one out of five Spanish workers is currently unemployed. Among the young, the jobless rate stands at over 50 percent.

European finance ministers on Tuesday agreed to give Spain more time, until 2014 instead of 2013, to bring the deficit down to 3 percent of GDP in accordance with the European Union fiscal treaty’s limit. They also committed €30 to support Spanish banks, the first batch of a €100 billion rescue package.