Mariano Rajoy announces €65bn in austerity measures for Spain

Spanish prime minister makes spectacular U-turn to comply with EU bailout terms

Spanish prime minister Mariano Rajoy on Wednesday announced sweeping cuts and tax increases totalling €65bn (£51bn) in austerity measures that opposition politicians warned would sink Spain further into recession.

In a spectacular U-turn, Rajoy raised sales tax by three percentage points, contradicting his government's insistence that this would damage consumer spending, strangle growth and punish the poor.

He also cut unemployment payments, pledged to bring forward a move to retirement at 68 years old and reduced civil service pay. Promised changes to energy laws looked likely to increase electricity tariffs.

The measures came the day after a leaked memorandum of agreement between eurozone countries and Spain revealed strict conditions for a banking bailout of up to €100bn.

That memorandum insisted that Spain comply with the recommendations made by Brussels to cut a deficit that reached 8.9% of GDP last year.

Those recommendations included the sales tax rise, pension changes and the only stimulus element included in Rajoy's measures – reduction of social security contributions over the next two years.

It remained unclear exactly how much money Spanish savers who invested billions of euros in preference shares issued by savings banks will lose as a result of the bailout agreement. The memorandum insisted that they shoulder considerable losses.

The measures came as Spain struggles with a double-dip recession, 24% unemployment and ailing banks that need external aid to survive.

Rajoy, who came to power pledging tax cuts, admitted he did not like the measures.

"These measures are not pleasant, but they are necessary," he told parliament. "Our public spending exceeds our income by tens of billions of euros.

"We have to get out of this hole and we have to do it as soon as possible," he said, pointing to borrowing costs that have reached an unsustainable level of 7%. "There is no choice."

He was applauded by his own deputies, who have held an absolute majority in parliament since a general election in November.

Opposition politicians reminded him that he and his ministers had previously warned that a sales tax hike would damage consumer spending and do further damage to the economy.

The measures were announced the day after Spain won European Union approval for the bank bailout and a more relaxed deficit programme, which changes this year's deficit target from 5.3% to 6.3% of GDP.

Other measures he announced included further cuts in government spending, closures of state-owned companies and the privatisation of ports, airports and rail assets. While Rajoy spoke, thousands of coal miners marched on the industry ministry in Madrid to protest against a 63% cut in subsidies to mining companies.

Some had walked 18 days from northern and eastern mining regions and were received as heroes in Puerta del Sol, one of Madrid's main plazas.

A bailout memorandum will be signed on 20 July.

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Giles Tremlett

The GuardianTramp

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