- Associated Press - Wednesday, July 11, 2012

MADRID (AP) — Spain‘s government imposed more austerity measures on the beleaguered country Wednesday as it unveiled sales tax increases and spending cuts aimed at shaving 65 billion euros ($79.85 billion) off the state budget over the next 2½ years.

A day after winning European Union approval for a huge bank bailout and breathing space on its deficit program, Prime Minister Mariano Rajoy warned parliament that Spain‘s future was at stake as it grapples with recession, a bloated deficit and investor wariness of its sovereign debt.

“We are living in a crucial moment which will determine our future and that of our families, that of our youths, of our welfare state,” Mr. Rajoy said to catcalls from the opposition socialists and other parties as he revealed the biggest single amount of projected deficit savings in modern Spanish history.

He spoke as thousands of miners stung by a huge cut in government subsidies marched through central Madrid and clashed with riot police outside the Industry Ministry.

The spending cuts, designed to cut 65 billion euros from state budgets by 2015, include a wage cut for civil servants and members of the national parliament and a new wave of closures at state-owned companies. Spain also will speed up a gradual increase in the retirement age from 65 to 67. They are to be approved officially Friday at a Cabinet meeting.

Spaniards have had to digest round after round of austerity measures since Mr. Rajoy’s conservative government took power in December. Until now, there have been 60 billion euros ($73.71 billion) in spending cuts and tax increases by the central government or regional administrations. If measures taken by the previous, Socialist government are included, the number goes up to 75 billion euros ($91.85 billion). Now, albeit spread over 2½ years, comes another 65 billion euros.

“This is the reality. There is no other and we have to get out of this hole and we have to do it as soon as possible and there is no room for fantasies or off-the cuff improvisations because there is no choice,” Mr. Rajoy told lawmakers.

The measures are in exchange for the bank bailout of up to 100 billion euros ($122.85 billion) granted to Spain by the other 16 countries that use the euro and extra time to cut the Spanish budget deficit. Finance ministers approved the bailout program at meetings in Brussels this week, and as much as 30 billion euros ($36.74 billion) could flow to Spain‘s banks by the end of the month. The country’s banks are saddled with billions of euros in toxic loans and assets following the collapse of the country’s real estate market. The full amount Spain will seek is not yet known.

Europe’s finance ministers also this week extended until 2014 Spain‘s deadline for achieving a budget deficit of less than 3 percent of its annual economic output. The size of Spain‘s economy in 2011 is estimated to have been $1.5 trillion.

The bank aid and the deficit-cutting come at the cost of greater European Union supervision of Spain‘s finances, both for the government and the banks, even though Mr. Rajoy’s government insists it has given up no sovereignty.

“In exchange for the bank bailout agreement, Brussels, the ECB [European Central Bank] and the IMF [International Monetary Fund] have placed Spain and its institutions in a situation of strict monitoring and control,” Spanish newspaper El Pais said in an editorial Wednesday.

The concern among investors and Europe-watchers is that further austerity cuts will push Spain‘s economy further into recession in the short term, making it even harder for the government to trim its deficit.

Spain — the fourth-largest economy in the eurozone — has been struggling to keep a lid on its government deficit in the midst of a recession while trying to support its troubled banking industry. There are fears that should Spain need a bailout of its own — as did Greece, Ireland and Portugal — the eurozone would struggle to finance it, pushing the region further into recession.

However, said Mark Miller of Capital Economics in London, markets are concentrating on the planned bank bailout, which could get the economy up and running again. So if the bailout works, it should eventually compensate for the bitter cocktail of the new austerity package.

“‘It is the classic case of short-term pain for longer-term gain,” Mr. Miller said.

Wednesday’s increases in sales tax include a 3 percentage point hike on products and services such as clothing, cars, cigarettes and telephone services to 21 percent and a 2 percentage point increase on goods such as public transport fares, processed foods, and bar and hotel services to 10 percent. The sales tax on basic goods such as bread, medicine and books stays at 4 percent.

Other measures outlined Wednesday included:

• 660 million euros ($808.05 million) in cuts in government spending beyond the reductions already outlined in the 2012 budget.

• Wage cuts for civil servants and members of the national parliament.

• Further closures of state-owned companies.

• The scrapping of tax deductions for homeowners.

• A 30 percent cut in the number of town councilors.

• A slight reduction in unemployment pay, designed to encourage jobless people to seek work more quickly.

• A 20 percent cut in government subsidies to political parties and labor unions.

• The possible privatization of ports, railroads and airports.

In Brussels, spokesman Simon O’Connor said the European Commission, the EU’s executive arm, welcomed the government’s announcement of the new measures as “an important step to ensure that the fiscal targets for this year can be met.”

Financial markets greeted news of the measures. The interest rate on Spain‘s benchmark 10-year bond dropped 0.22 percent to 6.57 percent, away from the 7 percent levels it reached earlier this week, while the country’s IBEX stock index was up by 1.1 percent in afternoon trading.

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