Spain's new government revealed on Friday that the public deficit for 2011 would come in at 8% of GDP, well above a target of 6%, and announced income and property tax hikes and a civil servant wage freeze in response.
Spain has been under market scrutiny about its ability to control public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the Euro zone debt crisis has spread.
Deputy Prime Minister Soraya Saenz Santamaria in the new conservative government outlined public spending cuts worth 8.9 billion Euros to tackle the deficit.
We're facing an extraordinary and unexpected situation, forcing us to take extraordinary and unexpected measures said Santamaria arguing that the treasury budget was far above what had been announced by the previous Socialist government.
While Italy debt-mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better, although it too has been hit with high borrowing costs.
The previous Socialist government cut the budget shortfall from 11.2% of GDP in 2009, and the Conservatives must take up the baton and bring the deficit down to 4.4% in 2012 and 3% in 2013. The Socialist government had anticipated a 6% of GDP deficit for 2011, but conservatives after checking numbers say it is in the range of 8% of GDP.
The conservatives, who swept to victory in November amid dissatisfaction over the Socialists' handling of the crisis, have pledged to turn the economy around while reforming a broken labour market and pulling the country out of a prolonged slump.
Spain officially revealed negative growth in the third quarter and the new Economy minister Luis De Guindos said the contraction will persist in 2012, before things begin improving.
Following the collapse of the construction industry and land speculation, Spain currently has the highest unemployment in the EC, 25% and among the 18/28 age group the percentage soars to 50%.
The new Treasury Minister Cristobal Montoro also announced tax hikes that, he said, will focus on the wealthy, raising around 6 billion Euros.