After the riots, Spain swings the axe on spending

Madrid approves most brutal cutbacks since the Franco era as Europe boosts bailout fund

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The Independent Online

A day after violent protests and a general strike took over most Spanish cities, the government in Madrid yesterday announced the country's deepest cuts in public spending in more than 30 years.

The eye-watering Budget, the most austere since the Franco era, included a €27bn (£22.5bn) package of spending cuts and tax rises. It came as European finance ministers buckled under international pressure and agreed to increase the size of the eurozone's "firewall" in an attempt to dampen fears of a return of financial contagion and to unlock more resources from the International Monetary Fund.

But it was still uncertain last night whether the decision to boost the eurozone bailout funds to €800bn would either find lasting favour with financial markets or persuade non-eurozone G20 nations to sanction an increase in the IMF's lending capacity.

Last night UK Treasury ministers were said to be "underwhelmed" by the European deal. And Whitehall sources indicated that the Government would not be making its mind up soon about additional IMF resources.

The Finnish Prime Minister, Jyrki Katainen, also warned yesterday that his country would not approve more bailout funds if this latest effort was found wanting.

Meeting in Copenhagen, finance ministers agreed on a plan to combine the funds of the existing bailout pot, the European Financial Stability Facility (EFSF), with the funds of the incoming European Stability Mechanism (ESM). This will take the new emergency lending capacity of the eurozone to about €800bn.

The decision on increasing the IMF's total lending capacity from $500bn to $1 trillion will be taken by nations on the multinational lender's board at meetings scheduled for next month. Britain and the United States have both argued that the IMF must not increase its resources until Europe makes a significant further commitment of its own.

Speaking to The Independent yesterday, Mr Katainen, who took a hard line in negotiations over the size of the firewall, warned that more funds on top of this would not be forthcoming because further pledges risked undermining the solvency of some of the few remaining AAA-rated nations in the eurozone, such as Finland.

"We do what we can, what is responsible and what is credible. If somebody says you have to destroy your credibility by raising a firewall to too high a level, then one cannot help, you have to leave," he said.

Such comments indicate that counties such as Spain will have to manage on their own. The Prime Minister, Mariano Rajoy, promised tough new measures when his Partido Popular came to power last November. He was true to his word yesterday, and all government ministries will face enormous cuts to their budgets, averaging 16.9 per cent.

Hardest hit, despite a joint last-minute petition from 500 NGOs on Thursday, was the Ministry of International Development and Co-operation. El Mundo reported that the ministry's total budget will be slashed by €1.3bn, on top of the €1bn removed from development and social programmes in a previous round of cuts in December.

Spain's enormous civil service will see pay frozen and job creation schemes pruned. Consumers will also suffer. Electricity charges will rise by 7 per cent, and gas by 5 percent. A rise in corporation tax, coupled with last December's increases to rates, income tax and capital gains tax, is estimated to net the government an extra €12.3bn, and a further €25bn could come via a black market amnesty.

The Treasury Minister, Cristobal Montoro, recognised that the cuts were "the biggest in democracy" but that he believed "these policies will bring us out of our difficulties".

It will be of scant comfort to the Spanish people – already battered by 23 per cent unemployment and suffering the country's second recession since 2009 – that the cuts could have been even bigger. Spain had initially pledged to the EU a budget deficit target of 4.4 per cent this year, whereas the latest austerity measures aim to reduce it to only 5.3 per cent.

With Spain now falling back into recession, there are fears that the harsh cuts and tax increases could exacerbate the economy's problems, a view that the Spanish government was at pains to deny yesterday. Given that the preceding cuts provoked Thursday's general strike, more popular unrest following yesterday's announcements cannot be ruled out.