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article imageA look inside Spain's $81 billion spending cuts, tax increases

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By Andrew Moran     Jul 12, 2012 in Business
Barcelona - Spanish Prime Minister Mariano Rajoy introduced an $81 billion austerity package Wednesday that includes a number of spending cuts and new taxes as well as increases to address the growing budget deficit.
The Spanish government faces a national debt of $885.57 billion, a budget deficit of $79.3 billion and an unemployment rate of 25 percent. To address the challenges of its economic downturn and the government financial dereliction, Spain is going through a series of austerity measures.
On Wednesday, Spanish Prime Minister Mariano Rajoy unveiled new taxes, sales tax hikes, spending cuts and changes to the way the public sector does business. Altogether, the government introduced $81.28 billion in spending cuts that will shave the budget deficit by the year 2015.
Rajoy warned that if necessary actions were not taken then the deficit could increase another $8 billion.
“We are living in a crucial moment which will determine our future and that of our families, that of our youths, of our welfare state,” said the centre-right People’s Party prime minister, who will oversee one of the largest deficit savings in Spain’s recent history, reports Reuters.
“These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euros. This is the reality. There is no other and we have to get out of this hole and we have to do it as soon as possible and there is no room for fantasies or off-the cuff improvisations because there is no choice.”
Taxes
In the proposed austerity budget, Rajoy encouraged a three percent hike in the Value Added Tax, which, if approved, would jump to 21 percent for items such as clothing, telephone services and cars. There would also be a two percent increase on services like public transportation, hotel services and processed foods. The sales tax for bread and medicine will stay at four percent.
The government proposed an end to tax deductions for homeowners. Also, the production of hydroelectric, nuclear and thermoelectric energy would be charged four percent, which is an indirect tax of about $2.40 for each consumer.
Analysts have noted that with the unemployment rate at 25 percent, these taxes would be a significant increase and burden for those living on fixed-incomes, the poor, students and the unemployed.
Public Sector Cuts & Government Reforms
The conservative government took an axe to the public sector. The government will reduce the number of days off for public employees, eliminate the Christmas bonus and introduce cuts to wages of civil servants and Members of Parliament.
Furthermore, town councillors will be cut by 30 percent, while government subsidies to political parties and labour unions will be decreased by 20 percent. More public workers could lose their job when more state-owned companies shut down and if airports, ports and railways become privatized.
There will be a reduction in unemployment benefits to ensure that people are seeking work. The retirement age increase will be sped up from 65 to 67, but pensions as a whole will not be touched, which was an election promise during Rajoy’s campaign.
Bailout, Protests & More
This comes as the Spanish government agreed to a financial bailout by the 17-nation eurozone. Finance ministers concurred to a $121.93 billion loan to Spain, but the government has yet to accept it because it is waiting for two independent audits of the company’s banking system.
Massive protests have been ongoing throughout downtown Madrid. Thousands of miners, public sector workers, activists and students have been marching around the city protesting the austerity measures.
Spain’s income tax rate is 43 percent and the corporate tax rate is 30 percent.
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