Spain PM announces 65 bn euro austerity package

Spain's Prime Minister Mariano Rajoy announced Wednesday a 65-billion-euro ($80 billion) austerity package to avert financial collapse as angry miners rallied against subsidy cuts. Rajoy, interrupted by howls from opposition members as he outlined the cuts, performed a U-turn by ramping up value added sales tax having promised he would not raise it, and took an axe to state expenditure. "These are not pleasant measures but they are necessary," said the bearded 57-year-old leader of the conservative Popular Party. Rajoy reminded parliament that Spain is going through one of its worst recessions in history, with unemployment at 24.4 percent, and economic activity set to decline by 1.7 percent this year. Spain's premier said new spending cuts and other measures including notably a rise in value-added tax would bring in 65 billion euros by the end of 2014 to help trim the annual deficit. The European Union had demanded a VAT rise along with a series of other tough measures as it gave Spain an extra year to bring its bulging public deficit back to agreed limits. The interest rate which Spain has to pay to borrow for 10 years eased fractionally as the measures were announced but remained at a crippling level of 6.743 percent from 6.773 percent on Tuesday. Key measures announced by Rajoy: -- VAT goes up to 21 percent from 18 percent, and the reduced rate on some products such as food goes up to 10 percent from eight percent. A special four-percent rate on basic needs such as bread is untouched. -- Public administration is to be reformed to save 3.5 billion euros, including a drastic cut in the number of publically owned enterprises and a 30-percent cut in the number of local councillors. -- For the newly unemployed, benefits will be cut after six months from 70 percent of basic salary to 50 percent. Previously, the benefit had been reduced after six months to 60 percent of salary. -- Certain bonuses paid to top civil servants will be cut, and the Christmas bonuses for top public officials will be eliminated. In Brussels, eurozone ministers agreed the previous day to provide a first slice of 30 billion euros for Spain's banks this month, with 100 billion euros potentially available in all. The 17-nation single currency bloc agreed, also, to extend a deadline for Spain to cut its public deficit to the European Union's limit of 3.0 percent of gross domestic product by one year to 2014. As Spain struggles with recession, the bloc agreed to relax the deficit target to 6.3 percent of GDP from 5.3 percent in 2012; to 4.5 percent from 3.0 percent in 2013 and then impose a 2.8-percent goal for 2014. In return, Madrid had to enact further austerity. It had already approved in March a budget for 2012 that squeezed out 27 billion euros in spending cuts and tax increases. "Compared to previous packages, the measures this time seem relatively straightforward to implement and will be hard to evade for tax payers," said Christian Schulz, senior economist at Capital Markets. Worries about the eurozone and Spain mean that the previous austerity package would likely fail to raise the promised revenue, said the London-based analyst. "The July measures should do more to increase the credibility of the Spanish reform efforts vis-a-vis sceptical northern European leaders," he said in a report. Eurozone financial chiefs agreed June 9 on the banking loan for Spanish banks, crippled by bad property-related loans, and they plan to create a single banking authority to eventually inject the capital directly. As part of that banking aid, the eurozone insisted that Spain's progress on cutting its deficit and reforming the economy would be "closely and regularly reviewed" in parallel with the banking sector. Street protests are already mounting over austerity measures in a country with a jobless rate of 24.4 percent. Coal miners, hundreds of whom marched from their northern pits to Madrid, joined a major demonstration in Madrid on Wednesday against subsidy cuts that they say will destroy thousands of jobs. Violent clashes have broken out in more than a month of protests over Madrid's decision to slash coal industry subsidies this year to 111 million euros from 301 million euros last year. Unions say the cuts will destroy coal mining, which relies on state aid to compete with cheaper imports, and threaten the jobs of around 8,000 coal miners and up to 30,000 other people indirectly employed by the sector. Meanwhile in Portugal, a eurozone country which has been rescued by the European Union and International Monetary Fund, doctors and nurses began a two-day strike against cuts in the budget for health services.