Spain’s New PM Warns of Drastic Spending Cuts

The new conservative Prime Minister of debt-scarred Spain Mariano Rajoy has vowed he will make deep spending cuts in order to tackle the country’s massive deficit.

Specifically, he informed the Madrid parliament that he seeks to slash spending by 16.5 billion euros ($21.5-billion) next year.

However, Rajoy did not spell out exactly where he will cut, while concurrently offering more companies lower tax rates.

We are confronting enormous difficulties and must make very demanding efforts, he told MPs in Madrid.

He also vowed that his administration’s premier duty will be to create jobs -- the Spanish unemployment rate is at an astounding 21.5 percent, the highest in the Euro zone by a wide margin. Among young people (those under 25), the jobless rate it about 46 percent.

Moreover, the economy appears to have slipped into another recession.

Rajoy warned lawmakers: “The one and only part of public spending that will increase is pensions. All other components may be reduced.”

Madrid’s budget deficit clocked in at 9.2 percent of GDP last year – Rajoy wants that figure cut by more than half, to 4.4 percent next year. He also told parliament that he wants to reform Spain’s labor laws and consolidate some banks.

Rajoy and his Partido Popular (Popular Party) won a resounding election last month, handing the incumbent Socialists a devastating loss amidst an historic economic crisis in Spain.

The new Prime Minister will be sworn in on Wednesday by King Juan Carlos and his new cabinet will assume its role on Thursday, According to reports, Rajoy will present a budget for 2012 (which will include spending cuts in detail) at the end of the month.

Reuters reported that since Rajoy won the election, the yield on Spanish bonds has declined from unsustainable highs, reflecting a growing confidence in the new government’s ability to tackle the crisis.

However, given the depth and magnitude of Spain’s economic woes, no quick-fixes are possible.

Silvio Peruzzo, economist at RBS told Reuters: “The [proposed] reforms are spot-on, but Spain is facing headwinds that may be beyond Rajoy's measures. The key issue remains that Spain is still extremely vulnerable to any wrong decisions that could be potentially made at a European level, and measures could also be undermined by a deteriorating growth outlook.”