Spain unveils unprecedented austerity budget to avoid EU bailout

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REPORTING FROM MADRID -- Spain unveiled the most austere budget in its democratic history Friday, with plans to save $36 billion through spending cuts and tax hikes in an effort to comply with European Union rules and convince jittery markets that it won’t be the next to ask for a financial bailout.

Spain’s civil service will be worst hit, with salaries frozen and 16.9% cut from government ministries’ funding. New taxes will be levied on large corporations and energy, with electricity bills rising by 7%.

But the draft budget does not contain cuts to what many here feared: pensions, welfare and Spain’s free healthcare system. The sales tax also remains unchanged.

Still, it’s the most slimmed-down budget any Spanish government has proposed since the country’s 1977 return to democracy after the death of military ruler Francisco Franco. Budget Minister Cristobal Montoro noted the historical significance, calling Spain’s financial situation ‘extraordinary.’

‘We are in a desperate situation when it comes to the fiscal outlook,’ Deputy Prime Minister Soraya Saenz de Santamaria told reporters. ‘We’re looking to turn the situation around, as well as plant the foundations for growth and job creation.’

The budget requires approval by lawmakers, but with Prime Minister Mariano Rajoy’s commanding majority in parliament, its passage is assured. That means that some of its provisions can begin to be implemented right away, such as the electricity rate hike, which starts this weekend.

Rajoy rattled nerves and financial markets last month when he admitted that Spain would not be able to lower its deficit to what it promised EU officials in Brussels. He struck a deal with the European Commission to raise the target instead to 5.3% of GDP -- more than three percentage points lower than last year’s deficit but still well in excess of the EU’s limit of 3%. Since then, Spain’s long-term borrowing costs have been persistently high, reflecting investors’ concerns about the economy’s health.

Markets here rebounded at the news of the draft budget, which was presented unusually late because Rajoy’s conservative government only took power in December. Also Friday, Eurozone finance ministers meeting in Copenhagen agreed to boost the continent’s bailout reserves.

The Spanish budget was unveiled a day after millions of workers staged a massive, nationwide strike against labor reforms many perceive as too pro-business, at a time when one in four here is out of work. The strike slowed public transport and sparked scattered confrontations between protesters and riot police, but no serious injuries were reported.

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-- Lauren Frayer