Spain budget: Cuts to total 27bn euros this year

First deputy prime minister, government spokeswoman and minister of the prime minister"s office Soraya Saenz de Santamaria (C), Spain"s Minister of Industry, Energy and Tourism Jose Manuel Soria (R) and Spain"s Minister of Treasury and Civil Services Cristobal Montoro Romero Deputy Prime Minister Soraya Saenz de Santamaria said "serious efforts" were needed

Spain is cutting 27bn euros ($36bn; £22.5bn) from its budget this year as part of one of the toughest austerity drives in its history.

Changes will include freezing public sector workers' salaries and reducing departmental budgets by 16.9%.

The government says it will raise 12.3bn euros this year, aided by an increase in tax for large companies.

Deputy Prime Minister Soraya Saenz de Santamaria said the nation was in an "extreme situation".

"Our top priority is to clean up public accounts," she said.

"This is a moment that demands serious efforts to reduce spending but also structural reforms to cause the economy to grow and create jobs."

But economists are questioning whether the cuts will be enough to satisfy Spain's European partners.

'Insufficient' cuts

Key points

  • Ministries' budgets cut by up to 50%
  • Civil servants' wages frozen
  • Electricity bills up 7% and gas up 5%
  • Unemployment benefit frozen
  • No rise in VAT
  • Pensions to rise in line with inflation
  • Corporation tax revenue to rise by reducing deductions companies can make
  • Amnesty on tax evasion in return for 10% fee

Last month Prime Minister Mariano Rajoy agreed with the European Commission to reduce Spain's deficit from 8.5% to 5.3% of GDP in 2012.

Javier Diaz Gimenez, professor of economics at IESE Business School in Madrid, said: "This [budget] seems to be non-credible.

"They will not be making the 5.3% target agreed with Brussels, because the cuts are insufficient given the growth forecast," he told BBC News.

This could mean further cuts are needed before long.

"I suspect that the government could be forced to implement further austerity measures later this year, with lingering economic downturn set to place additional strains on an already perilous budget deficit reduction plan," said Raj Badiani, an economist at IHS Global Insight.

Start Quote

"You have the Greek model, or the Irish model. You can either go kicking or screaming, or you can bite the bullet, like people have done in Ireland."”

End Quote Gayle Allard Economist

The main risk is that the government's tax revenue projections for 2012 look too optimistic," he said.

There are concerns, however, that even the latest spending cuts could further damage the chances of getting the Spanish economy growing again. It is in recession and is expected to shrink by 1.7% this year.

Soraya Saenz de Santamaria said this would not happen.

"Our obligation towards Spanish people and the rest of the EU citizens is to get public accounts into shape," she said.

"Not at any cost, but with measures that support those citizens who need it the most and not paralysing a possible recovery or job creation."

Budgets slashed

Under the 2012 budget the unemployed will see their benefits maintained and pensions will continue to rise.

Consumers have also been spared some pain as VAT will remain at its current level.

A government minister said Spain needed to tighten up its finances to meet EU targets for reducing deficits without stifling economic growth and job creation.

That is the challenge.

Privately some in government accept these calculations involve a risk.

The economy is in recession and some predict it will shrink by around 2% this year - even before these savings are made.

The fear is that Spain could be tipped into a downward spiral.

But they can expect higher living costs as Energy Minister Jose Manuel Soria announced a 7% rise in electricity bills and 5% rise gas bills from 1 April.

The government is also going ahead with a previously-announced increase in income tax by 1.9%.

The 27bn euros of cuts is equivalent to 2.5% of the country's economic output.

Amongst government ministries, the big losers are the foreign office, whose budget has been halved. Industry, energy and tourism will get a 32% cut, while the public works budget will be slashed by 34%.

More details will be published next Tuesday when the budget goes before Parliament. It is expected to be passed formally in June.

'Not yielding'

On Thursday, police clashed with demonstrators as hundreds of thousands swamped the streets in Barcelona and other cities.

Unions said 800,000 people joined the protest in Barcelona. Police put the number at 80,000.

Spanish protesters Planned labour market reforms have proved deeply unpopular in Spain

Some marchers in the city smashed windows and set rubbish bins alight. Police fired tear gas and shot rubber bullets at the ground, TV pictures showed.

In the capital, Madrid, unions said about 900,000 people took part. The government did not give a figure.

The BBC's Europe editor, Gavin Hewitt, says the size of the demonstrations on Thursday were an indication that many are losing patience with austerity.

Unemployment in Spain is currently the highest in the EU at 24%. Nearly half of Spain's under-25s are out of work.

The general strike was the government's first big challenge since Mariano Rajoy took office after elections last November.

Despite the opposition, the government says it is committed to reining in its spending.

"The question here is not whether the strike is honoured by many or few, but rather whether we get out of the crisis," Mr Montoro said.

"That is what is at stake, and the government is not going to yield."

Bailout fears

Separately, eurozone ministers have agreed the expansion of Europe's bailout reserves.

The ministers, meeting in Copenhagen, have decided to boost the joint lending power of the "firewall" to 800bn euros.

Investors - worried about a bailout for Spain or Italy - wanted the fund to increase from its current size of about 500bn euros to closer to 1 trillion euros. But there was resistance from Germany to an increase of that scale.

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