- Associated Press - Wednesday, January 11, 2012

MADRID — Spain's Parliament approved the new conservative government’s first austerity measures Wednesday, which aim to rein in the country’s swollen deficit with euro8.9 billion ($11.5 billion) in spending cuts.

The measures, which also include income and property tax hikes, were approved by 197 deputies in the 350-seat lower house, where the ruling Popular Party has an absolute majority of 185 seats after a landslide election win in November.

Finance Minister Cristobal Montoro said the measures were severe but necessary, owing to what he called the mismanagement of the economy by the former Socialist government.

“The economy is stopped, we’re on the verge of a recession and the accounts are unbalanced as a consequence, among other things, of the deplorable decisions taken by the former government, which only made the situation worse,” Montoro told lawmakers.

Spain is battling to avert being dragged further into a debt crisis that has already forced Greece, Ireland and Portugal to seek financial bailouts.

In 2010, Spain began to emerge from a near two-year recession triggered by the collapse of a property and construction bubble that had fueled growth for nearly a decade. The country now has a 21.5 percent unemployment rate — the highest in the eurozone — and Economy Minister Luis de Guindos said recently the economy would slide back into recession early this year with the last quarter of 2011 and the first of 2012 both registering negative growth.

The country received another economic blow Thursday with the National Statistics Institute reporting that industrial production fell 7 percent year-on-year in November, the sharpest drop since October 2009, and down from a 4.2 decline the previous month.

“The fall in industrial output in November was deeper than expected, and with other key indicators, suggest that the economy is mired in deep contraction territory,” IHS Global Insight economist Raj Badiani said in a note.

“The latest economic data and survey evidence provide compelling evidence that the economy suffered a sharp reverse in the final quarter of 2011, with real GDP probably contracting 0.4 percent quarter-on-quarter.”

In Parliament, Montoro accused the former Socialist government of deliberately hiding figures that showed that Spain’s deficit for 2011 would be 8 percent of national income, and not 6 percent as the Socialists had claimed. He said the deviation represented an estimated euro20 billion ($25.4 billion) “black hole.”

However, Prime Minister Mariano Rajoy has acknowledged that the deficit of regional governments, most of which are run by his own conservative party, was responsible for 75 percent of the deviation.

Other measures in the austerity package include a freeze on civil servants’ salaries and on practically all government hiring. Pensions, however, are to be increased by 1 percent, the only area of spending to rise. Taxes on income and property will also be raised but only for two years.

Treasury Minister Cristobal Montoro said the tax increases will be progressive, with the wealthiest paying more and that the impact on lower-income earners will be minimal.

The government projects that the tax increases will bring in euro6.2 billion ($7.9 billion) on top of the euro8.9 billion saved on the spending cuts.

The package was part of an extension of the 2011 budget because the last government did not pass one for 2012. More austerity measures are expected when the government presents its 2012 budget by the end of March.



Click to Read More

Click to Hide