Business World

Tuesday 12 December 2017

Spanish PM ditches his election promises for €65bn in cutbacks

A protester is detained by riot police during clashes between supporters of Spanish coal miners and riot police as they ended a
A protester is detained by riot police during clashes between supporters of Spanish coal miners and riot police as they ended a "Marcha Negra" (Black March) near the Industry Ministry in Madrid July 11, 2012. Photo: Reuters
Brendan Keenan

Brendan Keenan

A dramatic u-turn by the seven-month-old Spanish government has seen election promises ditched in a €65bn austerity package.

Prime Minister Mariano Rajoy made no bones about what he was doing when he spoke to parliament yesterday.

"I said I would reduce taxes and I am increasing them. The circumstances have changed and I have to adapt myself to them," Mr Rajoy said.

The main reversal was a rise in the standard rate of VAT to 21pc, from 18pc. Mr Rajoy opposed raising the tax when the previous government increased the rate. He reduced benefits for those unemployed for more than six months, having denied in a recent debate that he planned any cuts.

Mr Rajoy's government enjoys a comfortable majority but public support has fallen since his victory on November 20. As demonstrations outside the parliament turned violent, analysts warned of political trouble when the summer holiday period ends in September.

The measures, equivalent to 6pc of GDP over three years, are in line with conditions set out in a draft EU memorandum on the €100bn bank rescue package agreed by finance ministers on Monday.

It is the fourth austerity package in seven months. Spain has to present a new austerity plan for 2013 and 2014 to the EU by the end of this month.

Failure

The country is in the unusual position of having to comply with external conditions from the EU, even though the government is still funding itself on the markets.

However, failure to act would have shut Madrid out of the bond markets, even though the effects of austerity may also scare off lenders.

Traders appeared to react favourably yesterday, with the yield demanded on Spanish 10-year debt falling below 6.6pc. If new borrowings could be raised at those levels, it would allow Spain to avoid a formal bailout for some time -- although this is by no means certain.

EU leaders agreed this week that Spain's budget deficit could be set at 6.3pc of GDP this year, instead of the original 5.3pc, and the country could have an extra year to come within the 3pc permitted level.

The measures are seen as necessary to meet even the easier targets. "These are not pleasant measures but they are necessary," Mr Rajoy said.

The government also scrapped a mortgage rebate which it introduced at its second cabinet meeting, in December, on foot of an election promise, but kept a promise to raise pensions, while promising changes to the system.

Further pledges may have to be broken. Mr Rajoy said state-owned airport and railway assets may be sold, having previously cancelled privatisation of Madrid and Barcelona airports.

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