Government unveils 27-billion-euro austerity package in bid to avoid bailout

The Cabinet on Friday approved 27.3 billion euros of savings for the rest of the year — the biggest austerity package seen in Spain’s modern democracy — with the hopes that the country will stay on track to meet its deficit-reduction goal for the end of 2012 and avoid the same bailout fate that was suffered by Greece, Ireland and Portugal.

Speaking after a meeting of the Cabinet, Finance Minister Cristóbal Montoro described the country’s finances as “critical,” and reiterated that the government’s aim is to bring down the deficit by the end of the year from the current 8.51 percent of GDP to 5.3 percent, in line with Brussels’ demands.

“Spain will keep its good faith by ending the year with a solid deficit figure, as we pledged \[to Brussels\],” Montoro said.

The government plans drastic cuts in all the ministries with an average reduction of 16.9 percent of spending — two percentage points higher than the figure Prime Minister Mariano Rajoy cited on Tuesday. In all, 17.8 billion euros will be slashed from the central government’s expenditures.

The biggest cuts will be made in overseas aid through international cooperation and development programs, with 594 million euros of cuts.

The Cabinet also approved hiking taxes on big businesses and increasing court and other legal fees as new sources of projected revenue. The government hopes to rake in some 12.3 billion euros by eliminating corporate tax deductions, including suppressing a controversial goodwill tax break that made it easier for Spanish companies to purchase foreign firms and expand overseas.

Deputy Prime Minister Soraya Sáenz de Santamaría ruled out new taxes, including another hike in value-added tax (VAT), which was increased in 2010 from 16 percent to 18 percent.

“We are in a desperate situation when it comes to the fiscal outlook,” Sáenz de Santamaría told a news conference after the Cabinet meeting. “We are looking to turn the situation around as well as laying the foundations for growth and job creation.”

Montoro also announced that Spaniards who have overseas accounts to avoid paying taxes or currently have domestic earnings being paid under the table will be given a chance to regularize their finances by paying a 10-percent fee on the revenue declared, without any other fines or sanctions. The finance chief said he hopes to bring in another 25 billion euros with this amnesty.

The Cabinet also approved a seven-percent hike in electricity rates, and a five-percent hike in gas rates beginning Sunday.

The government’s plans will go to parliament on Tuesday, and are expected to be formally passed in June.

Spain’s new financial goals come as European finance and economy ministers, meeting in Copenhagen Friday, agreed to create a permanent bailout fund for the euro zone with a temporary lending capacity of about 700 billion euros for member states.

Economy Minister Luis de Guindos, who was in Denmark for the meeting, said that “Spain will no longer be a problem for the Union” as he presented his colleagues with the Spanish budget plans.

The budget was presented months later than usual given that the Popular Party took office in December.