By Nick Mann | 12 July 2012
Spain’s latest €65bn package of spending cuts and tax increases is essential to address the growing cost of servicing the country’s debt, prime minister Mariano Rajoy said yesterday.
Speaking in the Spanish parliament, Rajoy announced a 3% increase in VAT, from 18% to 21%, as well as increases to environmental taxation and cuts to unemployment payments and civil service pay.
A further €600m will also be cut from departmental budgets and 20% more cut from the subsidies paid to political parties, trade unions and business organisations.
‘I am aware that the measures I have announced here are not pleasant,’ Rajoy said. ‘None of them would be individually and they are even less so when looked at as a whole.
‘They may not be pleasant but they are entirely essential. We find ourselves in an extraordinarily serious situation that must be corrected with absolute urgency.’
Spain faces an ‘extremely high’ budget deficit which amounted to 8.9% of gross domestic product at the end of 2011, compared to the eurozone average of 4% of GDP. It also faces having to pay a 6% interest rate to service its growing public debt which is set to reach €800bn by the end of the year.
Rajoy said: ‘We must remember that Spain is in an especially weak position because of its excessive levels of debt and the serious recession we are going through, which we can only overcome by making progress in the intense process of correcting the deficit and implementing structural reforms, as this government is doing.’
Reducing the deficit was essential not only to meeting the requirements of eurozone membership but also to channel resources to the private sector to finance the consumption and private investment needed to boost economic activity, Rajoy explained.
It will also ensure the provision of public services is maintained by reducing the interest Spain has to pay on its debt, he added.
On Monday, eurozone finance ministers gave Spain an extra year to reduce its budget deficit below the 3% limit set under the European Union Stability and Growth Pact.
