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Spain and Italy outline austerity measures

Reuters

Spain is to impose a new tax on the rich and Italy has approved a 24-billion-euro austerity package as the countries struggle to reduce their budget deficits. Meanwhile, the International Monetary Fund's chief economist has warned against too much austerity.

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“The government aims to ask better-off citizens to do their bit for the country,” Prime Minister Jose Luis Zapatero told parliament. He did not give details of the package.

Last week, the government approved 15 billion euros of austerity measures, which include a five per cent pay cut for civil servants and a freeze on pensions. This is in addition to a 50-billion euro austerity programme that was announced in January.

Spain needs to cut its budget deficit from 11.2 per cent of GDP to three per cent by 2013, when it will be a legal upper limit.

 
On Tuesday, the Italian government said it would make 24 billion euros of cuts and savings for the year 2011-2012.

The focus is on public spending cuts, but the government is also going to crack down on tax evasion. Public employees will have their salaries frozen for three years and high-paid government officials will face pay cuts. It is also imposing a tax on stock options and private sector bonuses.

It is aiming to cut its deficit from 5.3 per cent in 2009 to 2.7 in 2012.

The chief economist of the International Monetary Fund has warned that austerity measures might end up being counter-productive.

“There is a risk that, under market pressure, some countries overdo austerity,” said Olivier Blanchard in an interview withLa Tribune. “That would be a mistake. Markets tend to lump a series of countries in the same basket. In fact, other European countries don’t need to take the same draconian measures as Greece to reduce their budget deficits.”

He said countries like Italy and Spain could afford a more gradual adjustment to limit the negative impact of spending cuts on growth. This is worse during fragile economic times. When the private sector is cutting costs, the government can increase spending to counteract it but, when both are cutting back, there is a danger of creating a vicious cycle.

 
Greece was forced to make savings of 30 billion euros in return for 110 billion euros of emergency funding from the IMF and the European Union.

 

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