Spain announces ‘most austere’ cuts ever

A day after a general strike disrupted transport, almost paralysed heavy industry and brought thousands of protesters into the streets, the conservative government laid out plans to save more than 27bn euros (£23bn) by cutting departmental spending by 17 per cent and freezing public sector pay.

Its budget deficit target is equivalent to 3.5 per cent of GDP, Treasury Minister Cristobal Montoro said, while the country’s regional governments will have a deficit target of 1.5 per cent of GDP and local authorities a 0.3 per cent target.

Tax adjustments would raise an extra 12.3bn euros (£10.2bn) this year, he added.

Mr Montoro described the budget as the most austere of Spain’s democratic history. “This is a very hard adjustment, which means giving up many spending programmes,” he said.

Prime Minister Mariano Rajoy has said he will reduce the budget deficit to equal 5.3 per cent of gross domestic product this year from 8.5 per cent of GDP last year, despite concerns that austerity measures will only push the economy deeper into recession.

Brussels had agreed to let Spain aim for a 2012 deficit equal to 5.3 per cent of GDP, rather than the more demanding 4.4 per cent.

The Spanish economy entered recession in the first quarter of this year, according to government estimates, the second since 2009 and after two years of stunted growth.

But observers say further austerity will likely compound matters for Spain as it attempts to avoid the downward spiral suffered by Greece and Portugal, both of which needed bailouts.

In a research note, Morgan Stanley said: “Even after the relaxation of the 2012 deficit reduction target, we think that making ends meet will be challenging, though not impossible.

“We expect the Spanish economy to shrink by 2 per cent this year, courtesy of a substantial belt-tightening, still tight credit conditions, slowing exports and higher oil prices.”

Spain: the Brussels budget suicide pact

While Spain’s austerity packages may be the worst in its recent history, their European neighbours are also implementing measures, the likes of which not have been seen for decades.

Pawel Swidlicki, researcher at the independent think-tank, Open Europe, told Channel 4 News: “Practically everyone in Europe is implementing some sort of austerity measures.

“Hungary is being threatened by sanctions from the EU to get its deficit under 3 per cent of GDP and the Romanian government actually fell because of opposition to budget cuts.

“Countries in the eurozone also have to consider the stability of the currency union as a whole when carrying out their austerity policies. The EU Commission, and also individual member states, in particular Germany, the Netherlands and Finland have been very critical of countries they see as implementing insufficient measures to tackle deficits.

“However, the Netherlands cannot claim sainthood – it has a deficit of around 4.5 per cent of GDP and is not excluded from having to make cuts – it announced this morning it will cut its international aid budget by 1 billion euros (£833m).”

He added: “Greece has had the most swingeing cuts, its consolidation plans are more ambitious than any austerity package produced in recent times. No country has ever attempted that level of fiscal consolidation, that of 20 per cent of GDP by 2013.”

Meanwhile, elsewhere in Europe…

Euro-sterity: what is size of austerity cuts around Europe?

(Cuts package amount in euros and as percentage of GDP in 2011)

Germany: -37.6bn euros, -0.4 per cent
France: -83.2bn euros, -1 per cent
Italy: -37bn euros, TBA
UK: -129bn euros, -1.5 per cent
Ireland: -22.3bn euros, -2.6 per cent
Greece: -37.6bn euros, -6.3 per cent

(Source: ETIU)