Rajoy Outlines Budget Cuts as Protests Hit Madrid

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Spain's Prime Minister Mariano Rajoy
Mariano Rajoy, Spain's prime minister. Photographer: Angel Navarrete/Bloomberg

Spanish Prime Minister Mariano Rajoy rolled back social-welfare protections and raised taxes to clinch emergency aid and pacify investors as anti-austerity protesters marched in the capital.

Rajoy announced cuts in unemployment benefits and public wages, signaled reductions in pensions and raised sales taxes as part of a 65 billion-euro ($80 billion) package of deficit cuts, risking a deeper recession. As striking miners clamored for aid to keep their industry alive in a march along Madrid’s main boulevard, Rajoy trimmed union funding by 20 percent.

Spain’s desperation for foreign capital to sustain public services and keep its banks afloat has ripped control of policy from the government, leaving officials to implement the diktats of markets and the European Union. Preventing a meltdown in the fourth-biggest euro economy is key for policy makers to limit risks to the 17-nation currency union.

“We have very little room to choose,” Rajoy told the national parliament in Madrid. “I pledged to cut taxes and now I’m raising them. But the circumstances have changed and I have to adapt to them.”

The measures announced today, Rajoy’s fourth austerity package in seven months in office, correspond with policy conditions set out in a draft memorandum governing the 100 billion-euro bank rescue package. European leaders held out the prospect of buying Spanish debt to trim yields as long as Rajoy complies with their demands, which include sharing losses with junior debt holders.

Market Reaction

Spain’s benchmark Ibex stock index rose 1.1 percent and the risk premium on 10-year government debt compared to the German benchmark slid 17 basis points to 531 points at 5 p.m. Madrid time.

Demands by bond markets and European creditors that Rajoy put Spanish finances in order drove him further from campaign promises that helped him win the biggest majority since 1982.

Rajoy opposed raising value-added tax when the previous government increased the rate. He denied in a debate he planned to cut unemployment benefits, which amount to about 30 billion euros a year. His public support has fallen since his victory on Nov. 20, and thousands of miners and their supporters set off fireworks and waved banners in Madrid today after marching to the capital from northern Spain.

Police Injured

Protesters clashed with police, who fired rubber balls into the crowd and detained seven demonstrators, said an official at the Madrid police headquarters, who declined to be identified in line with policy. Ten police were treated for light injuries by emergency services, she said.

“There was a small incident and the police charged,” Justo Rodriguez Braga, general secretary of the Union General de Trabajadores in Asturias, said in a telephone interview. “There were various injuries with people bleeding.”

Miners want Rajoy to honor spending agreements made by the previous government which saw their industry awarded subsidies that equate to 290,000 euros per miner last year. Direct aid to companies of 111 million euros this year compared with 301 million in 2011 isn’t enough to keep the industry alive, union organizer Jose Luis Fernandez Roces said in a July 5 interview.

Police Charges

When the miners last gathered in Madrid in May, police charged demonstrators with batons and fired rubber balls into the crowd after a protester shot a firework at the Industry Ministry using a home-made rocket launcher, Fernandez Roces said. Last week, a golf ball fired from a similar weapon pierced the armor of a police van during a clash with authorities in northern Spain, he added.

The premier also scrapped a mortgage rebate, reversing a policy he implemented in December at his second Cabinet meeting to enact an election promise. At the same time, he raised pensions to meet another pledge. Today, he said he’d present parliament’s pension committee with a bill to make benefits more sustainable and address early retirement.

Rajoy also called on the regions to make deeper cuts and said a new law would limit pay for mayors and the services that municipalities can offer. The government will create a mechanism to help regions locked out of markets gain access to financing in return for deeper budget cuts, he said.

Swelling Deficit

Spain’s central government budget deficit swelled to 3.41 percent of gross domestic product in the first five months of the year, approaching the full-year goal of 3.5 percent after the government brought forward transfers to regional administrations and the social-security system, which is struggling under the burden of a 25 percent unemployment rate.

Spain won an extra year this week to bring its deficit within the EU’s 3 percent limit as European finance ministers agreed to loosen the 2012 deficit goal to 6.3 percent of GDP from 5.3 percent. Still, ministers urged Spain to step up budget cuts. EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday “additional measures would have to be taken rather soon.”

Even with the new targets, Spain needs to cut the deficit by 2.6 percent of GDP as the economy shrinks. The deficit overshot last year as the economic slump bit into tax revenue and regions unearthed undeclared bills. The government forecasts a contraction of 1.7 percent this year and Rajoy said today the slump would continue next year.

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