Spain unveiled its most severe budget cuts in decades on Friday as it finds itself once again cast as a central battleground in the fight to contain the euro-zone crisis, The Wall Street Journal reported.
The new conservative government of Prime Minister Mariano Rajoy presented more than €27 billion ($36 billion) in budget cuts—with a 9.6% reduction from 2011 central-government spending—through income-tax increases, spending cuts by ministries and incentives for tax avoiders and repatriating income.
"We are in a desperate situation when it comes to the fiscal outlook," said Deputy Prime Minister Soraya Sáenz de Santamaría. "We're looking to turn the situation around, as well as putting the foundations for growth and job creation."
The draft awaits approval from parliament, where the prime minister's party has an absolute majority. It is likely to be implemented by May, but not without a public uproar: the government faced a general strike over its labor reforms that drew an estimated 800,000 people to protests.
Now, if the euro-zone's fourth-largest economy can't convince European Union leaders and investors its financial house is in order, it may be forced to receive some form of external aid, economists and investors say. Such a move would be a test of Europe's resources and resolve to preserve the euro and could potentially destabilize the region.
The situation in Spain is also a test of whether austerity measures, in effect in many troubled European countries, can ultimately reignite the renewed economic growth that has been elusive since the outset of the crisis.
Spain demonstrated its resolve to stay on that path with its budget Friday, its most austere of the post-Franco era.
But there are concerns over whether Spain's 17 autonomous regions can meet a target deficit of 1.5% of gross domestic product laid out in Friday's budget. The regions control about a third of public spending—including on education and health care— and accounted for more than half of 2011's budgetary overrun.
"This is a very austere budget, without a doubt," said Juan José Toribio, a professor emeritus of economics at the IESE Business School in Madrid. "I think there's confidence in the central administration, but we'll have to see what happens with the regional governments."
Critics warn that painful cuts will strangle much-needed growth. Spain's economy is already set to contract 1.7% in 2012, according to the Spanish government.
Spain has slipped back into the crisis's cross hairs just a few months after it appeared to have weathered the worst of Europe's travails. The price the country pays to borrow from the market has risen again as worries intensify that its economic woes are entrenched and that a return to growth is unlikely soon.
Now, if the euro-zone's fourth-largest economy can't convince European Union leaders and investors its financial house is in order, it may be forced to receive some form of external aid, economists and investors say. Such a move would be a test of Europe's resources and resolve to preserve the euro and could potentially destabilize the region.
The situation in Spain is also a test of whether austerity measures, in effect in many troubled European countries, can ultimately reignite the renewed economic growth that has been elusive since the outset of the crisis.
Spain demonstrated its resolve to stay on that path with its budget Friday, its most austere of the post-Franco era.
But there are concerns over whether Spain's 17 autonomous regions can meet a target deficit of 1.5% of gross domestic product laid out in Friday's budget. The regions control about a third of public spending—including on education and health care— and accounted for more than half of 2011's budgetary overrun.
"This is a very austere budget, without a doubt," said Juan José Toribio, a professor emeritus of economics at the IESE Business School in Madrid. "I think there's confidence in the central administration, but we'll have to see what happens with the regional governments."
Critics warn that painful cuts will strangle much-needed growth. Spain's economy is already set to contract 1.7% in 2012, according to the Spanish government. Read more. (Subscription required.)
