Spain's new government said this year's budget deficit would be much larger than expected and announced a slew of surprise tax hikes and wage freezes that could drag the country back to the centre of the eurozone debt crisis.
In its first decrees since sweeping to victory in November, the centre-right government said the public deficit for 2011 would come in at 8% of gross domestic product, well above an official target of 6%.
It announced initial public spending cuts of €8.9 billion and tax hikes aimed at bringing in an additional €6bn a year to tackle the shortfall.
Spain has been under market scrutiny over its ability to control its public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the euro zone debt crisis spread.
Ten days ago the Treasury said the central government budget deficit was on course to meet a full-year target of 4.8% of GDP, which analysts said would push Spain's overall public deficit above its 6% target for the year.
But the scale of the overshoot took some economists by surprise and led them to forecast a deeper recession, ending the year on a downbeat note for the euro zone as a whole.
While Italy's debt mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better.
Measures taken by the previous Socialist government, while costing it the election, have kept the markets from pushing Spanish yields to unsustainable levels.
But as recession looms across the eurozone, the new government faces a rocky few years. After today’s initial round of tax hikes and spending cuts, it plans to unveil a final 2012 budget by the end of March.
