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By Bradley Gerrard and Nick Reeve | Published Sep 28, 2012

Spain announces further austerity measures

Spain’s government has outlined €39bn (£30.9bn) in spending cuts and tax increases for 2013 as it battles to bring its deficit into line.

The government has announced several reforms including an 8.9 per cent cut in government spending and an increase in tax which is expected to help raise an extra €5bn next year.

Finance minister Luis de Guindos also announced the creation of an independent budgetary authority to monitor government spending and a freeze in public sector pay for the third consecutive year.

Spain has been under pressure in recent weeks to accept a eurozone-funded bailout but prime minister Mariano Rajoy has so far resisted.

Equity markets stabilised on the news last night, but Spain’s 10-year bond yields remained above 6 per cent - a borrowing cost level generally seen as unsustainable.

In June, €100bn was injected into Spain’s ailing banks by the ECB, with the status of these institutions expected to be laid bare today (September 28) following an independent audit.

Trevor Greetham, director of asset allocation at Fidelity, said austerity was not the way to solve Spain’s problems.

“Efforts to deflate Spain into competitiveness raise the prospect of many years of wage cuts and property price falls that will necessitate ever larger fiscal transfers from the stronger countries, either directly or via pan-euro institutions like the central bank,” Mr Greetham said.

“In my view the least painful approach to reducing the burden of private sector debt is a period of higher than usual inflation – one underpinned by rising wage levels rather than tax and energy price increases.”

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