Spain raises Vat as part of €65bn austerity plan

Recession-plagued Spain unveiled austerity measures yesterday designed to slash €65bn from the public deficit by 2014 as Prime Minister Mariano Rajoy yielded to EU pressure to try to avoid a full state bailout.

The conservative leader announced a 3-point hike in the main rate of Vat on goods and services to 21% and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition.

“These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euro,” he told parliament.

Analysts said the draconian savings plan, tearing up several of Rajoy’s campaign promises, showed Madrid was already under de facto supervision from Brussels even though it has not requested a sovereign bailout and retains access to bond markets. Some said the tax increases could exacerbate the recession.

Spain won softer deficit targets from its EU partners this week and also negotiated rescue aid of up to €100bn from the eurozone’s bailout fund for its crippled banking sector.

In line with recommendations from the European Commission, Rajoy announced new indirect taxes on energy, plans to privatise ports, airports and rail assets, and a reversal of property tax breaks that his Popular Party had restored last December.

Keeping one election promise, Rajoy did not touch pensions but he said he would discuss with the Socialist opposition a change to the system in line with EU recommendations to link benefits to life expectancy. He also said the tax burden was being shifted from taxes on labour and income to consumption and energy in line with European policy.

The latest measures completely overhauled Rajoy’s previous budget plan, in which the central government and 17 autonomous regions had put in place €48bn in savings for 2012, insufficient to bring the deficit into line.

Rajoy announced reforms to city hall governments, shutdowns of public companies, reduced benefits for civil servants, budget cuts for political parties and labour unions.

The main civil service trade union responded by announcing work stoppages in July and a possible strike in Sep. Small groups of public workers protested outside parliament and the Popular Party’s headquarters, chanting: “This is not a crisis, it’s a rip-off.”

The prime minister, who had pledged not to raise Vat, said he now had no choice.