December 30, 2011

Spain to Raise Taxes, Cut Spending

Budget shortfall worse than expected; cuts to total $19.3 billion

Spain’s new Prime Minister Mariano Rajoy is taking tough steps to combat his country’s debt crisis, and has announced that while taxes will rise substantially, spending will be cut even more. He aims to reduce a worse-than-expected deficit by 14.9 billion euros ($19.3 billion).

Bloomberg reported that Spain’s deficit will hit 8% of GDP for 2011–twice the size of Italy’s predicted deficit and four times that of Germany–with, according to spokeswoman Soraya Saenz de Santamaria, tax increases that will total 6 billion euros and spending that will be slashed by 8.9 billion euros.

However, such tight austerity measures could ruin any chance Rajoy has to help his country’s economy grow. The unemployment rate is currently 22%, the highest in Europe, and with such severe spending cuts the likelihood that Spain can grow its economy out of trouble is negligible.

Although Rajoy came to power, with the largest parliamentary majority in 30 years, on a wave of discontent that swept former Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party from power in November, the shine may have worn off as taxes rise on everything from income to interest on savings and expensive homes, as civil servants see their pay frozen and those collecting pensions see a paltry 1% increase. Still, Spain will continue its 400 euro a month unemployment benefit, something Spaniards cling to with almost one out of every four people out of work.

These cuts are only the beginning. Rajoy will have to find more in the new year if he is to meet the objective of cutting the deficit to 4.4% of GDP next year and 3% in 2013.

Spain is made up of 17 autonomous regions, and according to Budget Minister Cristobal Montoro, larger-than-expected shortfalls in those regions are responsible for the country missing its deficit target of 6% for 2011.

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