Last updated: July 11, 2012 6:45 pm

Spain steps up austerity amid protests

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Spain Miners protest©Bloomberg

The Spanish government unveiled €65bn worth of tax increases and public spending cuts as part of a deal to secure European aid to rescue its banking system as thousands of miners marched on the centre of Madrid to protest against austerity measures.

Facing heckles from opposition politicians Mariano Rajoy, prime minister, issued stark warnings about the risk to Spain’s future as he announced a rolling back of unemployment benefits, an increase in value added tax would rise from 18 to 21 per cent, and cuts to local government to achieve the savings over two and a half years.

“I know that the measures that I have announced are not pleasant but they are necessary,” Mr Rajoy said when announcing what is his government’s fourth set of austerity measures in the seven months it has held power.

As he spoke thousands of miners marched on the centre of Madrid, joined by other anti-austerity protesters, to bring the city’s main avenue to a near standstill, and sparking small skirmishes as police fired rubber bullets at parts of the crowds.

The miners, some of whom had spent weeks marching nearly 300 miles from the Asturias region north of Spain, to protest against coal subsidies being cut which they argue will force mines to shut down.

Mr Rajoy’s announcement followed European officials agreeing earlier this week to allow Spain an extra year to meet its budget deficit reduction targets and iron out further details of the €100bn of European aid to be pumped into the country’s banking sector.

Spain has been punished by the international investors it needs to buy its government debt, who have pushed up the country’s 10-year borrowing costs in recent months to euro-era highs as Mr Rajoy battles to clean up the country’s banking sector, and grapple with public spending.

On Wednesday yields on 10-year Spanish government bonds fell by 14 basis points at 6.70 per cent, having been above 7 per cent at the start of the week.

By raising VAT, Mr Rajoy was forced to add to a growing list of policy reversals in his time in office, with the prime minister having stood against tax increases made by the previous government when in opposition.

“I said I would reduce taxes and I am increasing them ... the circumstances have changed and I have to adapt myself to them,” Mr Rajoy said.

Mr Rajoy, having repeatedly pledged that his government would not waver on a plan to reduce Spain’s budget deficit to 5.3 per cent of economic output for this year, was this week permitted to reduce the target to 6.3 per cent by Brussels, and was given an extra year to come within the 3 per cent EU agreed limit.

Some observers have questioned whether a further round of austerity measures risks strangulating the Spanish economy, which is forecast by the government to shrink by 1.7 per cent at a time where the country suffers from the highest level of unemployment in the eurozone.

“If you raise taxes, but there is a shrinking economy, the question is how much will the state actually gain?,” said Francisco Longo, professor of governance and public affairs at ESADE business school in Barcelona:

“The big question is, what will be the consequences in Spanish society?... Rajoy has an absolute majority, but we have seen in other countries that even governments with absolute majorities can fall quickly”.

As trade union members joining the miners in solidarity Mr Rajoy announced that their state funding would be reduced by 20 per cent, scrapped property tax breaks, and said salary and bonuses for some public sector workers would capped or cut.

State-owned airport and railway assets may also be sold, raising the prospect of the cancelled privatisation of Madrid and Barcelona airports launched under Spain’s previous government being revived.

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