Spain PM calls for 65 bn euros in austerity cuts, taxes

Spain's Prime Minister Mariano Rajoy announced Wednesday 65 billion euros ($80 billion) in drastic spending cuts and a VAT tax rise to rein in spiralling sovereign debt. Rajoy, interrupted by howls from opposition members as he outlined the cuts, performed a U-turn on value added tax after promising he had no plan to boost the levy, and took an axe to state expenditure. "These are not pleasant measures but they are necessary," said the bearded 57-year-old leader of the conservative Popular Party. Spain's leader said new spending cuts and other measures including a rise in value-added tax would bring in 65 billion euros by the end of 2014 to help trim the annual deficit. The European Union had demanded a VAT rise along with a series of other tough measures even as it gave Spain an extra year to bring its bulging public deficit back to agreed limits. Among the new measures announced by Rajoy: -- VAT goes up to 21 percent from 18 percent, and the reduced rate on some products such as food goes up to 10 percent from eight percent. A special 4-percent rate on basic needs such as bread is untouched. -- Public administration is reformed to save 3.5 billion euros, including a drastic cut in the number of publically owned enterprises and a 30-percent cut in the number of local councillors. In Brussels, eurozone ministers agreed the previous day to provide a first slice of 30 billion euros for Spain's banks this month, with 100 billion euros potentially available in all. The 17-nation single currency bloc agreed, also, to extend a deadline for Spain to cut its public deficit to the European Union's limit of 3.0 percent of gross domestic product by one year to 2014. As Spain struggles with recession, the bloc agreed to relax the deficit target to 6.3 percent of GDP from 5.3 percent in 2012; to 4.5 percent from 3.0 percent in 2013 and then impose a 2.8-percent goal for 2014. But the eurozone aid comes at a cost. Spain has to present a new austerity plan for 2013 and 2014 by the end of this month. Eurozone financial chiefs agreed June 9 on banking aid for Spanish banks, crippled by vast loans made in a property bubble that burst in 2008. And as part of that banking aid, the eurozone insisted that Spain's progress on cutting its deficit and reforming the economy would be "closely and regularly reviewed" in parallel with the banking sector.