MADRID – Spain’s incoming prime minister, Mariano Rajoy, promised deep spending cuts in public administration yesterday while offering tax breaks for companies.
In his first speech to the new parliament, Mr Rajoy said budget stability, a costly round of bank consolidations and changes to Spain’s economic framework, including its labour law, would be his central objectives.
Mr Rajoy’s centre-right People’s Party was elected by a landslide in November. It faces a formidable task to revive an economy sliding into recession as the euro zone debt crisis widens, while meeting harsh European austerity demands.
“We are confronting enormous difficulties and must make very demanding efforts,” Rajoy told parliament. After a two-day parliamentary debate, the self-proclaimed “Mr Normal” will be sworn in by King Juan Carlos tomorrow and will name his cabinet.
The euro zone’s fourth largest economy is at the centre of the bloc’s debt crisis and investors have driven up Spain’s borrowing costs to near unsustainable levels.
But Mr Rajoy’s promises of more austerity have boosted business confidence and debt yields have fallen from euro-era highs since the election.
The risk premium on Spanish benchmark bonds over German benchmark debt narrowed yesterday by about four basis points to 331 basis points. This compares with 491 for Italy.
Mr Rajoy began his address with dire warnings for the struggling economy, which is believed to have already fallen into its second recession in three years. Domestic demand is flagging and export growth slowing.
Spain’s unemployment rate, moreover, is more than double the European Union average at 21.5 per cent.
Mr Rajoy said he would implement a hiring freeze throughout most of the public sector and announce detailed spending cuts on December 30th.
But Mr Rajoy outlined some immediate tax benefits for companies in order to boost employment and demand.
Small companies and the self-employed would not have to pay taxes before clients had paid them, as they currently do.
Small companies that make their first hire will get a €3,000 tax benefit, and corporations with less than €5 million in revenue will be put into a more favourable tax bracket.
Another measure was to move public holidays that fall in the middle of the week to the closest Monday or Friday. This should discourage people from taking more time to stretch the holiday.
Mr Rojoy said he would raise pensions in real terms – after the Socialists had frozen them – but pledged that would be his only spending increase.
He also hinted at reforms to the country’s treasured public health system, saying his party would redefine the basic services that the state would guarantee for everyone. Banks are also expected to be told they must sell of assets inherited from the property bubble. – (Reuters)