MADRID — Spanish civil servants, many dressed in mourning black, took to the streets Friday in angry protest as the government approved new sweeping austerity measures that include wage cuts and tax increases for a country struggling under a recession and an unemployment rate of near 25 percent.
Spain is under pressure to get its public finances on track amid concerns in the markets over the state of the country's banks and the wider economy.
"Spain is going through one of its most dramatic moments," Deputy Prime Minister Saenz de Santamaria said after a Cabinet meeting at which sales tax hikes and spending cuts were approved.
Admitting that the austerity measures were "neither simple, nor easy, nor popular," she said the government would try to enact the measures "with the maximum justice and equity."
The conservative government has come under mounting criticism that the austerity measures are hitting the middle and working classes the hardest.
"The government should go after the big companies that don't pay tax and bankers that have committed fraud and have run this country to the ground," said Pablo Gonzalez, 52, who works for the Madrid regional government. "Instead, we have to pay."
The aim of the latest package of measures is to chop (EURO)65 billion ($79 billion) off the budget deficit through 2015, the biggest deficit-reduction plan in recent Spanish history.
As dusk fell, several hundred mainly young protesters marched in Madrid, stopping to jeer outside the headquarters of the ruling conservative and opposition Socialist parties before heading to the parliament.
Though the increase in sales taxes, which risks slowing consumption and worsening Spain's recession, will take effect Sept. 1, other reforms will be left for later in the year, including a plan to speed up the gradual raising of the retirement age from to 65 to 67.
Meanwhile, Economy Minister Luis de Guindos announced the creation of a new mechanism to help Spain's 17 regions finance themselves more easily. Some, such as Valencia in the east, are finding it increasingly difficult to tap capital markets for much-needed cash.
The latest bout of austerity is prompting widespread opposition, not least from civil servants. In Madrid, several hundred government workers blocked traffic briefly in different parts of the city. In Valencia, several hundred Justice Ministry workers shouted "hands up, this is a stick-up" at a protest rally.
The civil servants – whose wages were cut 5 percent on average in 2010 in the first round of austerity cuts – are usually paid 14 times a year. The government is now axing an extra payment made just before Christmas. The prime minister, his cabinet and lawmakers will also suffer the cut. At the local, regional and central level, there are around 3 million public servants in Spain.
In the Puerta del Sol in downtown Madrid, about 500 civil servants gathered, about half dressed in black. Some women wore veils, as if at funerals. Protesters blew whistles and horns. Civil servants are often ridiculed in Spain and seen as lazy, clock-in and clock-out types with the luxury of lifetime jobs. But many earn as little as (EURO)1,000 a month.
Isabel Perez, a 40-year-old librarian, said "our wages have already been cut and now they take away the Christmas payment. I don't make it to the end of the month as it is. The extra payment gave some relief. We're not exactly millionaires." She earns (EURO)1,300 a month and had already faced a yearly (EURO)330 euro wage cut by the Madrid regional government.
The latest austerity package has come after Spain won approval from the other 16 countries that use the euro for the first (EURO)30 billion tranche of a bailout of up to (EURO)100 billion for its troubled banking sector. Spain also managed to secure an extra year to meet a European deficit reduction target of 3 percent of GDP. The size of Spain's economy in 2011 is estimated to have been $1.5 trillion.
Investors' response has been lukewarm, and the yield on Spain's benchmark 10-year bonds, a measure of investor wariness of a country's debt, remains very high at 6.61 percent, up 4 basis points for the day.
Investors are also becoming increasingly wary of placing money in Spanish banks, which are having to turn to the European Central Bank for financing.
In June, Spanish bank borrowing from the ECB rose 17 percent from May. The accrued total as of the end of that month was (EURO)337 billion, 77 percent of all the money owed to the ECB and seven times the figure from June 2011.
A draft memorandum of understanding agreed by eurozone finance ministers for Spain's bank bailout suggests billions in problematic assets should be segregated into an "external asset management agency" to clean up Spanish banks' balance sheets.
It also says that by the end of the year certain areas of jurisdiction – sanctioning and licensing – should be transferred from the Spanish economy ministry to the Bank of Spain.
This is seen as paving the way for Europe having a single bank supervisory body that will oversee central banks and be empowered to recapitalize Spanish and other troubled banks directly instead of via debt-laden government.
Harold Heckle contributed to this report.