Mariano Rajoy is applauded by PP party members after his speech in parliament. Ángel Díaz / EFE
It sounded almost like a surrender. “We Spaniards”, announced Mariano Rajoy to parliament on Wednesday, “have reached the point at which we can no longer choose between staying as we are or making sacrifices; we do not have that freedom; circumstances are not that generous”.
Seven months after coming into power with the promise of recovering credibility and confidence in Spain, the Prime Minister appeared in parliament with proof of his failure: cuts and tax hikes designed to save 65 billion euros over the next two and a half years, the most drastic package of adjustments in the history of Spanish democracy.
The Government has left little untouched. Everything Rajoy said he wouldn’t do is about to be approved by the Cabinet today, Friday. Value added tax (IVA) is going up, employment benefit is coming down, public workers’ salaries are being cut, care benefits reduced, among other measures.
At times on Wednesday Rajoy looked as though he had transformed into the José Luis Rodríguez Zapatero who, on May 12th 2010, announced a turnaround in his economic policy, also breaking his electoral promises, for fear of an imminent intervention from Europe.
Now the situation is slightly different; Europe has already moved in, albeit perhaps not as drastically as feared. The Government has insisted that the banking system bailout did not come with macroeconomic conditions, although speakers from the opposition groups took it for granted that the new cuts and the tax hike are all part of the deal.
Earlier this week it was announced that as well as bailing out the Spanish banks, Europe was to give Spain an extra year, until 2014, to reach its deficit target of three per cent of GDP. Rajoy was delivering Spain’s 65 billion euro part of the bargain on Wednesday.
An increase in VAT (Value Added Tax) or IVA (in Spanish: Impuesto al Valor Añadido) had been expected. On Wednesday Rajoy announced that the general rate, that covers most goods and services, will increase from 18 per cent to 21 per cent. Meanwhile the reduced rate, which includes food (except basic essentials), non-alcoholic drinks, transport, leisure, hotels, bars and restaurants, goes up from eight to ten per cent. The ‘super-reduced’ rate that covers essential foodstuffs (bread, milk, vegetables, eggs, etc), books, newspapers, medication and subsidised housing remains at four per cent.
This was one of the most unpopular measures Rajoy has had to announce in Parliament as Prime Minister, especially after he so fiercely slammed Zapatero’s increase from 16 to 18 per cent in 2010 as “a blow a bad government deals out to all its compatriots”.
Also included in Wednesday’s gloomy package was a cut in unemployment benefit. This will affect new unemployed after their sixth month on the dole when, instead of receiving 60 per cent of their base rate, they will only get 50 per cent. The 24 month limit to unemployment benefit remains the same.
Rajoy justified the measure saying that it would be an incentive for the jobless to go out and look for work. “If you are going to cut, cut, but don’t insult the unemployed” replied opposition leader, Alfredo Pérez Rubalcaba.
Other measures announced on Wednesday include the loss of the Christmas bonus for public sector workers, no tax rebate for home buyers, fewer councillors in local authorities and more tax on tobacco products.
How to save 65 billion euros...
VAT: The general rate of value added tax (IVA) goes up from 18% to 21%. The reduced rate goes up from 8% to 10% and the ‘super-reduced’ rate remains at 4%
Unemployment: Benefit reduced for new unemployed from 60% to 50% after sixth month
Dependence: Care aid amounts are to be revised
Public sector workers: ‘Funcionarios’ lose their Christmas bonus and the number of union representatives is to be reduced
Town Halls: Many municipalities with populations under 20,000 will lose powers to the provincial authority
Councillors: The number of local councillors will be reduced by 30 per cent and their, and the mayor’s, salaries will be fixed by law
Budget: Ministries will have to save another 600 million euros
Parties, unions and business : Subsidies to political parties, trades unions and business associations to be reduced by an extra 20%
Employment: Most incentives for taking on staff will go, but social security contributions paid by employers will fall two per cent between now and 2014
Extra taxes: A new ‘green’ tax to be made on pollution, to include fuel, as well a tax increase on tobacco products
Property purchase: The income tax reduction for the purchase of a main residence is to be abolished for sales made from 2013