Finance Minister Cristóbal Montoro on Wednesday warned that without the tax hikes and cuts in spending approved last Friday the state would not be in a position to pay public sector wages.
“There is no money in the state coffers,” Montoro told Congress. “What we have comes from taxes and if revenues don’t increase, we are at risk of not being able to meet the payroll.”
The Cabinet on Friday approved the largest austerity package since democracy was restored in Spain over 30 years ago. The measures include a hike in the standard value-added tax rate to 21 percent from 18 percent and in the reduced rate to 10 percent from eight percent. The payment of the traditional Christmas bonus for state workers was also suspended.
However, Montoro on Tuesday said lower income civil servants would be exempt from the move.
The austerity drive aims to trim the public deficit from 8.9 percent of GDP last year to 2.8 percent in 2014. Spain was given an extra year by the Eurogroup to bring the shortfall back within the European Union ceiling of three percent. The deficit target for this year was relaxed to 6.3 percent from 5.3 percent and to 4.5 percent from three percent next year.
There is no money in the coffers; we are at risk of not being able to meet the payroll”
Market players said Montoro’s remarks sparked a spike in Spain’s risk premium. The spread between the yield on the benchmark 10-year Spanish government and the German equivalent widened by 17 basis points to 576. It reached a euro-era record high of 576 basis points on June 18.
Civil servants have held a series of protest against the cuts and the CSI-F labor union that represents public workers has called for a strike in September.
In Wednesday’s debate in the lower house, Joan Tardà, a lawmaker for the ERC republican leftwing Catalan party, warned Montoro about the reaction to the cutbacks. “The protests that are being readied will wipe the smile off your face,” Tardà said.
Montoro claimed public sector workers are aware of the need for belt-tightening. “They know better than anyone that there is no money in the state coffers and that their wages depend on taxes,” the minister said.
The spokesman on public administration for the main opposition Socialist Party, Meritxel Batet, accused the government of pursuing cutbacks for “ideological” reasons.
“No country grows and creates confidence by undermining public services,” Batet said.