Spain announces cutbacks, tax increases

The measures, including frozen salaries for civil servants and a 9% budget cut for all government departments, are intended to save $50 billion.

Spain announced cutbacks and tax increases Thursday aimed at saving $50 billion from its budget next year, as Europe's fourth-largest economy struggles to avoid a larger bailout by its neighbors.

Under a draft budget for 2013, civil servants' salaries would remain frozen for a third year, all government departments would take a budget cut of about 9%, and new taxes would be levied on lottery winnings, the government said Thursday.

The budget announcement was made against a backdrop of unrest in Madrid. Thousands of Spaniards had launched an "Occupy Congress" movement two days earlier, surrounding the parliament with protesters in anticipation of painful cuts to public healthcare, education and pensions.

But Deputy Prime Minister Soraya Saenz de Santamaria said the government would dip into a social security reserve fund to keep paying pensions, and even increase monthly payments by 1%.

"The parts [of spending] that will increase are pensions, scholarship funds and interest on the debt," Santamaria told reporters after a Cabinet meeting.

Prime Minister Mariano Rajoy, elected in a landslide in November, has sought to keep his campaign promise not to touch pensions, while avoiding a second, bigger bailout for his cash-strapped government. Precious tax revenue has been diverted to jobless benefits as the unemployment rate rises and to regional administrations that have overspent for years.

Spain's jobless rate is the highest in the Eurozone, near 25%, with unemployment among young people double that.

Budget Minister Cristobal Montoro said that rate would not change significantly in 2013, but he also predicted that Spain would emerge from recession after next year.

Spain is already getting up to $125 billion in loans from Europe for its ailing banks, struck hard by plunging property values. Madrid plans to publish results of bank audits Friday and to announce how much it will tap from its European loan commitment.

Meanwhile, Castilla-La Mancha on Thursday became the fifth Spanish region to indicate that it would draw on a rescue fund set up by the central government. Only three of the country's 17 regions have ruled out needing aid.

Spain has made a commitment to reduce its budget deficit to 4.5% of its gross domestic product, or GDP, next year, compared with nearly 9% last year.

Some economists said the 2013 draft budget assumes levels of growth and tax revenue that are overly optimistic.

Frayer is a special correspondent.