Spain Fiscal


Spain: Spain approves massive austerity package

July 17, 2012

On 13 July, the Spanish Congress approved the largest spending cuts in the country's recent history. The EUR 65 billion austerity package includes a raise in the general VAT rate from 18% to 21%, a reduction in unemployment benefits, salary cuts for public workers and a comprehensive reform of local governments. The plan represents yet another attempt by the Rajoy administration to rein in the excessive deficit and convince investors that Spain can balance its battered public finances and will not require a full bailout. The measures come days after European finance ministers agreed to relax the country's budget deficit targets in exchange for additional fiscal consolidation efforts. Under the agreement, the fiscal deficit target for this year has been lifted to 6.3% of GDP - up from the previous 5.3% of GDP - and to 4.5% of GDP in 2013. European authorities also granted the country an additional year to bring down the fiscal gap to below the 3% of GDP threshold stipulated by the Maastricht criteria, and Spain will now have until 2014 to do so, with a target deficit of 2.8% of GDP set for that year. In addition to the austerity plan, the Spanish parliament also approved the creation of a new instrument, which will have a maximum capacity of EUR 18 billion euros, to help the country's autonomous regions to obtain funding in return for deeper budget cuts. So far, only Valencia has announced that it will tap the bailout fund in order to meet debt payments, although several other regions may follow.


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