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Spain is cutting 27 billion euros ($36 billion) from its budget this year, slashing spending and raising taxes in a bid to spur growth and tackle the country's budget deficit.
LONDON, UK – Spain’s government has unveiled a 27 billion euro ($36 billion) deficit-reduction budget, which will see spending slashed and taxes hiked in one of the toughest austerity drives in the country’s history.
The 2012 draft package will see public sector workers’ salaries frozen and departmental budgets cut by nearly 17 percent, Bloomberg reports. The government says an increase in taxes for large companies will help it raise 12.3 billion euros this year.
Some respite for consumers and the unemployed came with the news that VAT and jobless benefits are to remain at their current levels.
The budget was unveiled as euro zone finance ministers meeting in Copenhagen agreed to temporarily increase the 17-member currency bloc’s firewall, boosting the amount of rescue funds available in the case of an emergency from 500 billion euros to 800 billion euros ($1.1 trillion).
Addressing a press conference after a Cabinet meeting at which the budget plan was passed, Deputy Prime Minister Soraya Saenz de Santamaria said Spain was in an “extreme situation.”
“Our top priority is to clean up public accounts,” she said, according to Sky News, 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.
Finance Minister Cristobal Montoro said Friday’s plan was the most austere budget proposal since Spain returned to democracy in 1977, the Associated Press reports. The budget will to go to Parliament on Tuesday and is expected to be formally passed in June.
Spain is entering its second recession in three years, and has the highest unemployment rate in the European Union, with almost a quarter of its workforce jobless.
Last month the conservative government of recently appointed Prime Minister Mariano Rajoy agreed with the European Commission to reduce Spain’s deficit to 5.3 percent of GDP in 2012, and some economists are questioning whether Friday’s plan will enable the country to honor that deal:
“They will not be making the 5.3 percent target agreed with Brussels, because the cuts are insufficient given the growth forecast,” Javier Díaz Gimenez, Professor of Economists at IESE Business School in Madrid, told the BBC.
On Thursday Spanish police clashed with demonstrators as unions mounted a general strike across the country in protest against a recent overhaul of the country’s labor laws, which makes it easier and cheaper for firms to hire and fire workers.