MADRID — Spain is on the mend, Prime Minister Mariano Rajoy claimed Wednesday as he revealed a drop in the government's budget deficit.
The government has been trying to heal its public finances since it came to power 14 months ago by slashing spending and raising tax. While that's come at a price for the economy – which is in another recession and hobbled by 26 percent unemployment – Rajoy noted it was finally bringing the deficit down to less than 7 percent of the country's gross domestic product in 2012, from nearly 9 percent a year earlier.
"Spain's head is out of the water," Rajoy told Parliament in what was his first state-of-the-nation debate since taking office in December 2011. As well as problems with the country's economy, Rajoy is also battling allegations that a slush fund was used to pay senior members of his Popular Party.
Rajoy said the deficit reduction followed "a readjustment without precedent" in the economy. Official deficit figures are expected over the coming weeks.
Spain last year pledged to European authorities it would cut its deficit to 6.3 percent after the 2011 figure was found to have soared to 8.9 percent, nearly three times the limit for European Union countries using the euro currency.
In his pursuit of the promised deficit reductions, Rajoy has broken every major election campaign promise, stirring much social unrest and triggering two general strikes over the past 14 months.
On Wednesday he admitted he had failed to live up to some promises but insisted he had done his duty.
Rajoy promised "a second generation of reforms" that appeared to signal a shift in strategy – away from growth-sapping austerity policies in favor of credit incentives and youth employment initiatives
The measures include a reduction _and in some cases elimination – of social security payments by companies that hire people under 30 years of age part time. He also announced a (EURO)45 billion ($60 billion) credit program for small and medium-sized companies to be funded publicly and privately.
Rajoy began his near two-hour speech recalling that the country had nearly 6 million people out of work. He promised there would "not be a single moment of relaxation" until they had turned the economy around.
About one million additional people have lost their jobs under Rajoy's administration and the unemployment rate for people under 25 is now at 55 percent.
He boasted, however, that despite the economic legacy left by the previous Socialist government, his administration had changed the country's direction.
"Nobody would have bet on Spain a year ago but now nobody doubts that Spain will come out ahead," he said.
Spain's government borrowing costs soared to unsustainable highs last year, bringing the country close to having to seek a sovereign bailout loan like Greece, Ireland and Portugal. A promise by the European Central Bank in August to buy up bonds from countries that formally seek aid calmed investor concerns, however. Spain's borrowing rates have since eased to manageable levels. The interest rate on the country's 10-year bond on the open market was 7 percent last summer; now it is down to 5 percent.
Although several banks hit by the crisis were loaned (EURO)40 billion by Spain's partners in the 17-strong group of European Union countries that use the euro, the government insists it won't need any more external financial aid.
But analysts questioned Rajoy's optimism.
"The need for external financing for Spain will depend on what happens this year, not what was achieved last year," said Javier Diaz-Gimenez, economy professor at Spain's IESE Business School.
"I have serious doubts that the deficit target for the coming year will be reached, given the cutbacks that have already been made and the GDP contraction predictions."
Spain's economy, which is the fourth-biggest in the eurozone after Germany, France and Italy, has been shrinking for the last 18 months. The government predicts the country will continue in recession with 0.5 percent negative growth this year although analysts say this figure is conservative.
In the first debate address by opposition leaders, Socialist party head Alfredo Perez Rubalcaba lashed out at Rajoy's positive analysis saying the "state of the nation is critical."
"Nothing is better than a year ago and all that is important is worse," he said, accusing the government and the European Union of taking the wrong path to solve of the crisis.
Rubalcaba and other opposition leaders have repeatedly called in recent weeks for Rajoy to resign, arguing that the unemployment figures and corruption allegations left him without credibility.
The main corruption scandal affecting Rajoy erupted after the National Court said a former treasurer from Rajoy's Popular Party had amassed an unexplained (EURO)22 million in a Swiss bank account. Newspapers reports alleged that for years the treasurer made regular slush-fund payments to top party members, including Rajoy.
Rajoy and his party have denied the allegations but have failed to explain how the former treasurer amassed the money.
On Wednesday, Rajoy complained that the allegations of widespread corruption across the political system were unjust and damaging Spain's image. He called for a cross-party pact to combat the problem and promised stiffer penalties for those found guilty of corruption charges.
He also proposed audits for all political parties, labor unions and publicly financed companies as well as high-ranking officials and possibly deputies and senators.