MADRID: Spain is tightening the austerity screws as it starts paying a painful price for eurozone agreements to rescue its banks and relax Madrid's deficit-cutting targets.
Prime Minister Mariano Rajoy is to give parliament an outline of the new measures on Wednesday, expected to include drastic spending cuts and a VAT sales tax increase, which he had repeatedly argued against.
In an overnight meeting in Brussels, eurozone ministers agreed to provide a first slice of 30 billion euros ($37 billion) 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 the nation 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.
But the eurozone aid comes at a cost.
Spain has to present a new austerity plan for 2013 and 2014 by the end of this month, and the eurozone has already outlined some of the reforms it expects to see.
Both the European Commission and the International Monetary Fund have issued "recommendations" that Spain raise its VAT rate and take other measures such as accelerating an increase in the retirement age.
Well before eurozone financial chiefs agreed June 9 on the banking aid for Spanish banks, crippled by vast loans made in a property bubble that burst in 2008, Spain was under pressure to do more on the budget.
And 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.
"What Europe, or the European Commission, is requesting is a credible plan for viability and deficit reduction," said Daniel Pingarron, analyst at brokerage IG Markets.
"In that sense I think the key will be in what Rajoy says tomorrow and, moreover, in the cabinet meeting on Friday," he said.
Spain's premier had already warned on Saturday of more austerity to come in a country with a jobless rate of 24.4 percent and rising street protests over squeezed health and education budgets.
"In the coming days we will take decisions to reduce our public deficit," Rajoy said. "We will take decisions on structural reforms, some of them very significant -- some of them in July and others afterwards."
Despite heated and repeated opposition to increasing value-added tax from senior members of the conservative Popular Party government, including Rajoy, Madrid now seems bound to do so.
"It seems there will be an increase in reduced rates of VAT to try to increase the tax revenue through VAT and most importantly, there will be a very big cut in spending, in public spending via the state," Pingarron said.
Public workers' salaries would be cut and public sector jobs could be axed, he added.
"This is the main package of measures that the government will outline on Friday and with which it expects to save between 30 and 40 billion euros between this year and next year," the analyst said.
Budget Minister Cristobal Montoro warned of the impending VAT rise on Monday. "If VAT was paid by more of those who are supposed to pay, it would not have to be raised by so much," he told a business forum.
The new cuts will add to a tight-fisted budget for this year that already imposed unprecedented austerity measures, with tax increases and spending cuts amounting to 27.3 billion euros.
But a deepening recession pushes up welfare costs and slashes tax income to the state, making the task ever harder.
Spain's regions and municipalities, responsible for more than half of state spending including health and education, have already outlined austerity measures amounting to 18 billion euros.
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