Prime minister Mariano Rajoy announces further round of austerity even as EU pledges to cut savings target

This article is more than 7 years old

This article is more than 7 years old

Spain's prime minister, Mariano Rajoy, has announced a further round of cuts, despite worries that austerity measures may prolong a recession that has left more than a quarter of Spaniards unemployed.

Rajoy said the measures, which would be announced in detail on Friday, were necessary as Spain battles to bring down the European Union's highest budget deficit, which reached 10.6% of GDP last year.

"We have taken difficult, unpleasant decisions, but we have done so because it is absolutely necessary. Otherwise, we would be destroying the future," he said.

His announcement came amid reports that Brussels is set to significantly relax this year's deficit target, set at 4.5% of GDP.

Last year's deficit was inflated by a €40bn (£34bn) banking bailout, but it would still require major cuts or tax rises to reduce the underlying deficit from 7.1% to 4.5%.

The International Monetary Fund (IMF) boss, Christine Lagarde, last week added her voice to a growing wave of concern that austerity has gone too far and could prevent Spain from exiting recession.

"We favour a reasonable and sensible adjustment for Spain rather than focusing exclusively and excessively on deficit reduction," she told Spain's Expansion newspaper.

Spain's recession eased slightly in the first quarter, with output shrinking 0.5% compared with a 0.8% fall in the previous quarter. The country has been in recession for 21 months.

Jobs will not come until significant growth reappears. And with the economy expected to shrink by 1.5% this year, that will not happen soon.

The IMF predicts unemployment will hit 27% next year, further reducing the spending power of Spanish families.

Rajoy said he would resist increases to VAT and income tax. But he has been under pressure from Brussels to increase revenue, and may have to raise indirect taxes.

There was good news, however, from bond markets, where Spain's borrowing costs fell again, bringing the gap between the interest Germany and Spain must pay to borrow money for 10 years down to below three percentage points for the first time in a year.