Spain gears up for austerity under new government

[December 30, 2011]  MADRID (AP) -- Spain's new conservative government is set to unveil its first austerity measures later Friday as it tries to reassure markets that it has a plan to get a grip on its public finances at the same time as kickstarting an economy saddled with sky-high unemployment.

With much of the country on holiday, Prime Minister Mariano Rajoy of the Popular Party was presiding over a Cabinet meeting that will approve the first in what is expected to be a painful series of spending freezes or cuts and other reforms over the next few months.

Rajoy's Popular Party won a sweeping victory in Nov. 20 elections over the Socialists and his government took power only last week. All the ministers have been named but many other senior positions have not even been filled yet.

Like other troubled governments in Europe, Rajoy faces the delicate task of a deficit reduction measures in a country whose economy is expected to sink back into recession. The jobless rate is a staggering 21.5 percent, the highest rate of all 17 countries that use the euro.

Rajoy has said time and time again he is determined to meet Spain's commitment to cut its budget deficit to 4.4 percent of GDP in 2012.

Last week, he said that if the outgoing government's deficit forecast of 6 percent for 2011 was correct -- and he stressed it might be off -- the new government would have to achieve euro16.5 billion ($22 billion) in deficit reduction in 2012.

Fears over Spain's public finances and a banking sector heavily exposed to a real estate bubble that burst in 2008 have caused Spain's borrowing costs to soar amid fears it could end up suffering the same fate as bailed out Greece, Ireland and Portugal.

Spanish media say that just about the only good news expected to come out of Friday's Cabinet meeting is a small cost of living increase for pensioners. In May 2010, then Prime Minister Jose Luis Rodriguez Zapatero slapped the freeze on under growing international pressure, just as the Greek debt crisis was heating up. The pressure on Spain included a call from President Barack Obama.

The rest of the measures expected Friday will apparently be an early taste of the bitter medicine to come -- a freeze on civil servant wages hiring in most areas, except security forces.

And ministries will be told to tighten their belts, again.

As no budget for 2012 has yet been passed, Rajoy's Cabinet is expected to extend the 2011 spending blueprint into the first quarter of next year as it waits to get final figures on the economy. A full-blown 2012 budget is expected in late March.

On Friday, ministries will reportedly be told how much of the money they originally had earmarked for 2011 they must now refrain from spending.

[Associated Press; By DANIEL WOOLLS]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.