Spain's government unveiled a €27 billion ($36 billion) package of tax hikes and spending cuts in a desperate bid to convince the European Union and private lenders that it won't need a bailout.
The 2012 draft budget calls for raising taxes on large companies, freezing civil servant salaries and cutting central government ministry spending by an average of 17 percent. That means overall ministry spending will be cut by €14 billion, or about $18.7 billion; however, a sales tax increase that had been widely predicted leading up to the new conservative government's first full budget won't happen.
This government will not raise value-added tax [VAT] but is calling for an extra effort within corporate taxes, Deputy Prime Minister Soraya Sanez de Santamaria, who is part of the government elected in December, told Reuters.
This budget is the most austere Spain has faced since it regained democracy in 1977, said Finance Minister Cristobal Montoro.
The budget plan comes a day after protests in Barcelona and other cities caused widespread damage to shops and offices. Protest organizers said about 900,000 people demonstrated in Madrid, a sign the Spanish people are quickly losing patience with the government's tough austerity measures, organizers said.
During a news conference after a budgetary approval cabinet meeting, Montoro said, We are taking extraordinary measures because the situation is extraordinary.
The budget plan is expected to go to Parliament on Tuesday and could be formally passed in June.
Spain is hoping to avoid the fate of Greece, Ireland and Portugal -- who have been forced to seek their own bailouts -- by cutting its budget deficit to 5.3 percent of its gross domestic product from 8.5 percent last year. A bailout of Spain would further test the resources of the 17-nation euro currency bloc.
A large portion of the reductions Spain is seeking would come from an increase in taxes on large companies. What that actually means, Montoro said, is that the government would eliminate certain deductions companies had been able to take, which lowered their effective tax liability.
Despite Spain's promises to cut spending, analysts remain skeptical that government can hit its targets, especially given the country's dire economic forecasts.
This [budget] seems to be non-credible. Javier Diaz Gimenez, professor of economics at IESE Business School in Madrid, told the BBC.
They will not be making the 5.3 percent target agreed with Brussels, because the cuts are insufficient given the growth forecast.
The most recent forecasts predict Spain's economy will shrink by 1.7 percent in 2012.