Spain will cut state employees' wages and slash investment spending in a bid to reassure markets that it can get its budget deficit under control and contain the spread of the European debt crisis.
"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," prime minister Jose Luis Rodriguez Zapatero told parliament.
In the toughest deficit cutting moves by far by the Socialist government, Mr Zapatero said the government planned to save €15 billion in 2010 and 2011 with a series of cuts including a reduction of more than 6 billion in public investment.
Civil service salaries will be cut by 5 percent in 2010 and frozen in 2011, sparking immediate anger from unions, who have already put the brakes on a government move to raise the retirement age to 67 from 65.
"These moves confirm the government is bent on harsh austerity. It's a departure from the prime minister's line-up until now and is going to mean a change for relations with the unions", said Candido Mendez, head of the second-largest union confederation, the UGT.
The measures were announced after European Union and International Monetary Fund officials agreed at the weekend on a €600 trillion emergency fund for weak euro zone countries that have been hit by the debt crisis.
"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."
Mr Zarate added that the "cuts are taking place where it hurts," above all on civil servants' pay.
The pressures on Zapatero to act rose during the week as US president Barack Obama called him last evening and urged him to be "resolute" in efforts to implement economic reforms.
The measures will now reduce the budget deficit to 9.3 per cent of gross domestic
product this year, from 11.2 per cent in 2009. It will fall to 6 per cent in 2011 and be reduced to 3 percent of GDP by 2013, the government said.
Reuters