Spain Pledge to Fast-Track Budget Cuts
May 13th, 2010
Spain and Portugal, bowing to intense pressure from their eurozone partners and the International Monetary Fund, promised yesterday to accelerate implementation of their austerity plans.
The new pledges to cut national budget deficits are aimed at bolstering the credibility of the €750bn ($997bn, £651bn) stabilisation plan for the eurozone unveiled by the European Union and the IMF early yesterday.
Spain and Portugal, like Greece, have come under fire for lax fiscal policies. Their debt-raising costs rose sharply last week as investors lost confidence in their ability to solve their financial problems unaided.
Elena Salgado, the Spanish finance minister, said Spain would cut its budget deficit by a further 0.5 per cent of gross domestic product this year and an extra 1 per cent of GDP in 2011 – a total of about €15bn. However, the overall cuts envisaged between now and 2013 remained the same, she said, with the government making more effort in the first two years.
The original Spanish measures announced in January foresaw cutting the deficit from 11.2 per cent of GDP last year to 9.8 per cent in 2010 and 7.5 per cent in 2011. The IMF, as well as Spain’s opposition Popular party, criticised this as too slow.
José Luis Rodríguez Zapatero, the Socialist prime minister, has been forced into a rapid U-turn in his handling of the crisis. Last Wednesday he rejected faster deficit reduction. “Cutting the deficit, yes. Doing it drastically, no, because it compromises economic growth,” he said.
Ms Salgado gave no immediate details of how the government would achieve the quicker cuts, and Mr Zapatero is expected to flesh out the plan in parliament tomorrow.
The original plan includes higher taxes and reduced spending, including a near-freeze on civil service recruitment, but relies heavily on economic growth forecasts that are widely regarded as over-optimistic.
Portugal said yesterday it was prepared to increase taxation to cut its yawning budget deficit by almost half within two years.
Fernando Teixeira dos Santos, the finance minister, said additional austerity measures would reduce the deficit from a record 9.4 per cent of GDP last year to 5.1 per cent in 2011, compared with a previous target of 6.6 per cent. “If further efforts are needed to consolidate the budget, we will have to resort to other solutions, including tax increases,” he said.
It was the third time in less than two weeks that Portuguese leaders have announced accelerated or additional deficit-reduction measures.
As well as abandoning a pledge not to increase taxes, the minority Socialist government said it would delay plans to build a new Lisbon airport and other big infrastructure projects that were at the heart of its strategy for lifting the economy out of recession.
Ireland, another vulnerable economy on the periphery of the eurozone, is widely seen to be ahead of its EU partners in getting to grips with its budget deficit, although its shortfall this year is expected to be 11.6 per cent of GDP. The measures taken by Ireland in 2008 and 2009 already constitute a public spending squeeze equivalent to 5 per cent of GDP. Another 2.5 per cent contraction is under way this year.
Story from Financial Times
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