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Zapatero unveils fresh budget cuts

Text by News Wires

Latest update : 2010-05-12

Spanish Prime Minister Jose Luis Rodriguez Zapatero has announced fresh austerity measures to cut public deficit. The cuts, totalling 15 billion euros, will affect civil service salaries and public investment.

REUTERS - Spain will cut wages of state employees and slash investment spending, sparking union anger at the government’s toughest moves yet to rein in a budget deficit some feared could ignite a bigger version of the Greek crisis.

Prime Minister Jose Luis Rodriguez Zapatero’s fresh austerity measures came days after a $1 trillion fund was established to prop up weaker euro zone states and hours after U.S. President Barack Obama pressed him to be “resolute” in efforts to implement economic reforms.

“We need to make a singular, exceptional and extraordinary effort to cut our public deficit and we must do so now that the economy is beginning to recover,” Zapatero told parliament as he detailed the cuts totalling 15 billion euros ($19.05 billion) in 2010 and 2011.

The cost of protecting Spanish government debt against default fell immediately following the announcement to 141.5 basis points from 161 at the New York close on Tuesday, and U.S. stock futures picked up on the news.

Civil service salaries will be cut by 5 percent in 2010 and frozen in 2011, said Zapatero. The move was badly received by unions which, while so far maintaining good relations with the Socialist government, have already put the brakes on a government move to raise the retirement age to 67 from 65.

“The proposed cuts merit outright rejection,” said Ignacio Fernandez Toxo, leader of Spain’s biggest union confederation, Comisiones Obreras, saying that he would not rule out any action to protest against the measures.

But the leader of the second-largest labour grouping, Candido Mendez of the Union General de Trabajadores, sounded a more conciliatory note, saying that he still thought it possible unions might agree to labour market reforms.

Will unions act?

Unions only represent about 16 percent of Spanish workers and marches earlier this year against earlier austerity measures were tiny in comparison with the mass fury unleashed by their Greek equivalents. But Zapatero’s latest measures for the first time directly target the unions’ main constituency—public sector workers—which could put labour leaders, criticised by some of their members for inaction, under pressure to take more aggressive action.

The cuts, which follow an earlier 50 billion euros in austerity measures which had failed to convince markets, also include a reduction of more than 6 billion euros in public investment.

They are intended to reduce the budget deficit to 9.3 percent of gross domestic product this year, from 11.2 percent in 2009, 6 percent in 2011 and the 3 percent limit stipulated by European rules by 2013.

“These measures go in the right direction,” said European Economic and Monetary Affairs Commissioner Ollie Rehn.

But the leader of the conservative Popular Party opposition, Mariano Rajoy, accused Zapatero of allowing government finances to deteriorate to the point that Spain had to be pushed to act by the European Union, reducing the country to a “protectorate” of Brussels.

Zapatero surprises

“These measures reinforce all (those) ... taken over the weekend in Brussels and are what the market was waiting for, although not many people thought the prime minister would dare to take them,” said Nicolas Lopez, of Madrid brokerage M&G Valores.

But others warned that the cuts, however harsh, may not be enough for Spain, whose public sector is coming under strain from the huge debts accumulated by companies and households during a property boom.

Unemployment has hit 20 percent, and economists already doubt that Spain’s relatively uncompetitive economy will be able to reach the levels of economic growth that underpin the government’s deficit forecasts.

Data released on Wednesday showed the economy grew for the first time in nearly two years in the first quarter, expanding 0.1 percent quarter on quarter.

“We feel that Spain is going to fall short of the government’s latest growth projections of 1.8 percent in 2011, 2.9 percent in 2012 and 3.1 percent in 2013. This could imply that even deeper spending cuts or steeper tax rises will be required,” said Raj Badiani, of IHS Global Insight.

The measures were announced after European Union and International Monetary Fund officials agreed at the weekend on a $1 trillion emergency fund for weak euro zone countries that have been hit by debt crises.

The decision to establish the emergency fund was squarely directed at Spain and Portugal, seen as the next two weak links in the euro zone after Greece, to come up with fast and credible measures to reduce their budget deficits.

“After the weekend EU meeting it became very clear Spain and Portugal, and particularly Spain, would have to go the extra mile in cutting the deficit,” said Jose Garcia Zarate, an economist at 4Cast. “So they have done this, based on the Irish model.”

Portugal also unveiled extra fiscal measures over the weekend, including putting on ice the building of a new airport in Lisbon.
 

Date created : 2010-05-12

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