Spain introduces ‘most austere budget’ in its history

Spain, under threat of falling victim to the region’s debt crisis, will raise corporate taxes and slash public spending to trim the deficit this year by more than a third.

The government will cut spending by 17%, raise corporate tax rates and seek to boost revenue by allowing Spaniards to pay a fee of 10% to have the undeclared funds “regularized,” Budget Minister Cristobal Montoro said in Madrid. The 2012 spending plan seeks to reduce the budget gap to 5.3% of gross domestic product from 8.5% in 2011.

“We are in a critical situation that has forced us to respond with the most austere budget of the Spanish democracy,” Montoro said.

The yield on Spain’s 10-year bond has risen more than 50 basis points since March 2 when Prime Minister Mariano Rajoy unilaterally raised his deficit goal for 2012, as a deepening economic slump compounded a bigger-than-forecast shortfall last year.

The additional austerity may deepen the second recession since 2009 that’s left the country with the euro-region’s highest jobless rate at more than 23%

The 10-year yield fell 8 basis points to was at 5.39% at 11:05 a.m. in Madrid, leaving the difference with comparable German debt at 362 basis points, down from yesterday’s close of 365, the highest in almost four months.

The promised deficit reduction of 3.2 percentage points of GDP would be the biggest by that measure since at least 1980. That’s more than the cuts of 2.7 percentage points achieved by Rajoy’s predecessor, Jose Luis Rodriguez Zapatero, in the previous two years.

The budget plan seeks to avoid making consumers fund the cuts. The plan won’t raise value-added tax, cut pension payments or reduce civil-servants wages, Deputy Prime Minister Soraya Saenz de Santamaria said.

Mr. Rajoy riled European Union partners with his March 2 announcement at a summit in Brussels that he had raised Spain’s deficit target to 5.8% of GDP from the 4.4% initially pledged. Earlier he had attended a ceremony to sign a treaty aimed at ending the debt crisis by enforcing fiscal discipline. EU allies pushed back and got Spain to agree on March 12 to a 5.3% goal.

Mr. Rajoy tried to raise the target after his predecessors left him with a deficit of 8.5% of GDP, dwarfing the 6% the Socialists had pledged to the EU.