Spain’s austerity government announces biggest cuts since 1977

Spain’s new conservative government has unveiled a €27 billion (£17bn) deficit-reduction package for the upcoming year – the biggest cost-cutting measures since the Franco era.

The measures announced in yesterday’s budget include big spending cuts and tax increases on large companies.

Changes include cutting departmental budgets by almost 17 per cent and freezing public sector pay.

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The main cuts will be to the foreign office (54.4 per cent cut), industry, energy and tourism (31.9 per cent), and public works (34.6 per cent).

The government said it would make savings of €27bn for the rest of 2012 from the central government budget, equivalent to 2.5 per cent of output. The figure includes tax rises and spending cuts of around €15bn announced at the end of December. It comes a day after protesters clashed with police in cities around Spain as part of a general strike.

Finance minister Cristobal Montoro said it was the biggest deficit cut since Spain regained democracy in 1977. He said it was necessary to cut debt even during a recession which has left one in four people out of work.

“We are taking extraordinary measures because the situation is extraordinary,” Mr Montoro said after the cabinet approved the plans. The aim is to reduce the budget deficit from 5.3 per cent of its gross domestic product from 8.5 per cent last year.

Deputy premier Soraya Saenz de Sanatamaria said Spain was in an “extreme situation”, and the top priority was to “clean up the public accounts”.

Saenz de Santamaria said pensions would remain indexed to inflation, and VAT will not be raised, contrary to what some had predicted.

The blueprint will go to parliament on Tuesday and is expected to be passed in June.

“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 analyst Nicholas Spiro at Spiro Sovereign Strategy.

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But some economists have questioned whether other measures will be enough to fend of another eurozone crisis. Javier Diaz Gimenez, professor of economics at IESE Business School in Madrid, said: “They will not be making the 5.3 per cent target agreed with Brussels because the cuts are insufficient given the growth forecast.”

The government, which swept to power in November with the largest majority in 30 years, has already passed labour market and banking sector reforms to improve competitiveness and cut wage costs. Separately, Mr Montoro announced plans for a tax evasion amnesty.

Undeclared assets or those hidden in tax havens can be repatriated by paying a 10 per cent tax, with no criminal penalty, it was announced.

Unions have claimed up to 800,000 people took part in demonstrations in Barcelona on Thursday. Police said only 80,000 took part.

Spain is entering its second recession in three years.

Eurozone countries yesterday increased their bail-out fund to €800bn, below the €1 trillion sought by the International Monetary Fund.