Spain swings budget axe to save €27 billion

Spain will make budget cuts worth more than €27 billion in 2012, including a freeze on public workers’ salaries, to rein in its public deficit, the government said yesterday.

Government ministries will have an average reduction in their budgets of “around 17 per cent” this year, Deputy Prime Minister Soraya Saenz de Santamaria said after a weekly Cabinet meeting that approved the 2012 budget.

“We are in an extreme situation. Our top priority is to clean up public accounts,” she said, adding, “This is a moment that demands serious efforts to reduce spending but also structural reforms to cause the economy to grow and create jobs.”

Spain is racing to reduce its public deficit to reassure markets that it will not follow Greece, Ireland and Portugal in requesting an international bailout.

The government unveiled its austerity budget for 2012 a day after a general strike against spending cuts and labour market reforms that make it easier to cut jobs, when violence flared at protests in some cities. Hundreds of thousands of protesters swamped Spain’s streets on Thursday to back the strike, marred by clashes in Barcelona where youths set fire to bins and a Starbucks coffee shop.

With Spain having overshot its public deficit target last year, Prime Minister Mariano Rajoy has said he is determined to keep his promises to eurozone partners to slash the deficit, even at a time of soaring unemployment and recession.

The Popular Party government must bring down the public deficit to the equivalent of 5.3 per cent of economic output this year from 8.51 per cent last year. That would mean at least €20-30 billion in austerity measures, on top of €8.9 billion in spending cuts and €6.3 billion in tax increases already announced this year. The task is complicated by the recession, with the government predicting a 1.7-per cent slump in economic output this year.

However, while the Spanish government plans to freeze public sector workers’ salaries, it ruled out raising sales tax and said pensions would still be raised.

Financial group Citi’s chief economist Willem Buiter said Spain would likely need emergency help from international lenders this year to shore up its banks and public finances.