New government reneges on campaign tax pledge

Going back on an election pledge not to raise taxes, the Popular Party government on Friday announced historic widespread 8.9 billion euros in cuts as countermeasures to a bring down an eight percent of GDP deficit for this year - two percentage points higher than the previous Socialist administration had forecast.

Deputy Prime Minister Soraya Sáenz de Santamaría said the across-the board hikes in personal income tax of between 0.75 percent for those on lower incomes and seven percent for those who make more than 300,000 euros annually, will only be in effect for two years.

"This is an exceptional move that we didn't foresee," Sáenz said at a news conference following Friday's Cabinet meeting. "We had to resort to this because the previous government did not comply with its goal in reducing the deficit."

During this year's prime ministerial campaign, Mariano Rajoy and other PP officials pledged not to raise taxes, and criticized the Zapatero's government's decision in September to introduce a wealth tax for two years. The Socialist administration had forecast that Spain would end the year with a six percent of GDP deficit.

Rajoy's Cabinet also approved measures to hike the property-value-based municipal tax (IBI) for the next two years for dwellings that are appraised above the average price. But the PP administration has decided to reinstate the special tax deduction for new home purchases retroactive from 2010 - the same year it was eliminated by the previous Zapatero government - and introduce a super-reduced value-added tax (VAT) rate of four percent for purchases of a new home.

The prime minister is trying to bring Spain's debts down to meet a European budget deficit target of 4.4 percent by the end of 2012.

At the same time, Sáenz de Santamaría confirmed a previous announcement that there will be hike in pensions based on the consumer price index (IPC), and freezes in 2012 on public sector salaries. Government workers will also see their work week extended to 37.5 hours from the current 35 hours per week.

The minimum wage will also be frozen at 641.40 euros per month.

Political parties and labor organizations will also receive 20 percent less from their annual government subsidies, and Sáenz de Santamaría announced that the government will introduce in Congress next year reforms to political party financing laws.

The government has decided to postpone presenting the 2012 budget until March.

Besides the deputy prime minister, Rajoy's three top government officials in finance and labor - Economy Minister Luis de Guindos, Finance Minister Cristóbal Montoro, and Labor Minister Fátima Bañez - also appeared before reporters to explain the measures.