Dec 2011 01

Spain’s new centre-right Government has confirmed the first round of its new spending cuts and tax rises in an unprecedented raft of austerity measures that should total 16.2 billion euros this year.
The Cabinet says that the plan will meet the eurozone pact and will allow the country to avoid being attacked further by the financial markets.
Spain’s higher than expected year-end deficit, which jumped from the forecast six per cent to eight per cent, was the catalyst for these previously unforeseen steps, according to the Spanish Deputy Prime Minister, Soraya Sáenz de Santamaría. This two per cent ‘gap’ represents a shortfall of approximately 20 billion euros.
“This is the beginning of the beginning,” said Sáenz de Santamaria, adding that the country is facing “an extraordinary, unexpected situation, which will force us to take extraordinary and unexpected measures.”
Spending cuts
A total of 8.9 billion euros is being slashed from government departments’ budgets in 2012. The Ministry for Public Works bears the brunt with a 1.6 billion euro cut; followed by the Foreign, Industry and Finance ministries, that will lose a billion each.
Indeed, no department remains unaffected. For instance, the Employment, Health, and Defence ministries will lose 485 million, 409 million and 340 million euros, respectively. The majority of the cuts will be presented in the new budget in March.
Pay freeze
Last Friday’s announcement confirmed a pay freeze for Spanish civil servants as well as an extension to their working week from 35 to 37.5 hours. Similarly, an already-approved Royal Decree states that public sector workers will not be replaced for an unspecified time period, except in the Health sector, Education, the Military and the State Security.
The minimum wage has also been frozen for the first time since its creation. It will remain at 641.40 euros. However, pensions will increase by one per cent, although this is still below the current 2.4 per cent rate of inflation.
Other “unexpected measures” include suspending plans to extend paternity leave from two weeks to one month until 2013.
Tax hikes
In the Government’s plans, the IRPF income tax is to be increased. Those earning below 16,000 euros are to pay 0.75 per cent more per annum and those who earn in excess of 300,000 euros will be required to pay seven per cent more income tax. In her speech last Friday, Sáenz de Santamaría described the step as “fair and progressive.”
The IBI property tax is also going up, this time by 10 per cent. The deputy PM was keen to stress that this was “temporary” as it would only last two years and would, in addition, affect only the “above average value property.” However, most analysts say this equates to half of all properties in municipalities on the Costa del Sol. It is estimated the IRPF and IBI hikes will generate 6.2 billion euros.
Praise and criticism
After the Spanish Government set out its plans, the Vice President of the European Commission, Olli Rehn, who is responsible for Economic and Monetary Affairs, expressed his regret over the large deficit gap but welcomed the commitment of the new administration to correct the situation by 2013.
He said: “This consolidation package is sizeable and a very important step to shore up public finances, reassure financial markets, and to reform public administration”.
However, others have been less enthusiastic. Marc Weisbrot, the director of the influential, Washington DC-based Centre for Economic and Policy Research told this newspaper: “There seems to be no real measure to actually boost the country’s productivity. These cuts seem more of a ‘slash and burn’ approach when proper structural reforms are needed.
“Also, there are no measures to tackle Spain’s phenomenally high unemployment rate. If anything, these plans will in fact increase job losses in the short term.”.

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