By Tania Suárez, in Madrid | The president of the Spanish government Mariano Rajoy had a purpose this morning. He wanted to make a decisive move, not just a simple declaration of intentions. He wanted to get out of his hideout to take the reins of Spain. And he has done it.

During a speech in a plenary session of the Congress this morning, Rajoy has assumed the cost of the crisis and announced the package of measures that will be implemented. The whole amount of measures are aimed at saving €65 billion within 2 years and a half, and represent a step forward towards the fulfilment of Spain’s commitment with Brussels.

1- Civil servants and public employees

The Spanish president has suspended the second extra pay, not only for civil servants and public employees, but also for top management, deputies and senators. In the specific case of public employees, they will be compensated in 2015 by a generous pension plan.

In that sense, Rajoy said,

“from the beginning of the crisis, there has been a loss of 2.9 million jobs in the private sector, whereas in the public sector there has been an increase of 280.000 jobs.”

2- Rise in VAT

As expected, there will be an important rise in VAT on an immediate basis. The general rate goes up from the current 18% to 21%, and the reduced rate goes from 8 to 10%. However, the government has decided not to modify the super-reduced rate, which remains at 4%. This measure will be endorsed by the cabinet next Friday July 13.

3- Unemployment benefits

There will be a cut in unemployment benefits for new recipients, who in the next six months will receive 50% of the regulatory base instead of the previous 60%. The duration of the benefits will remain 24 months, and the unemployed will receive 60% of the regulatory base for the six first months, instead of the previous 70%.

4- Other cuts and measures

Rajoy has announced cuts in social contributions (one point in 2013, and another one in 2014); and also the abolition of the deduction in personal income tax for buying a primary residence. The government will abolish many hiring incentives, except those concerning new entrepreneurs’ contracts.

In the tax field, there will be new environmental taxes and a rise in special taxes such as tobacco. The Spanish government will also cut the ministers’ budget in €600 million, and the general State budget for 2013 will undertake a 20% cutback in grants for political parties, unions and business organisations.

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MADRID | People at command in Madrid seem baffled by the massive onslaught inflicted on the economy. A steeply rising risk premium coupled with the severe battering the stock market is receiving have dampened any hope to steer out of trouble with minor collateral damage. The dream of a soft landing has switched into the nightmare of plausible intervention. Fear to fall in that abyss has materialised in a rather hectic reaction.

A mere press release at the outcome of (informal) contacts between PM Rajoy and his economic ministers has announced huge €10-billion cuts in health and education. The aim is to trim regional expenditure where main deviations are to be expected. But delivery has conveyed the impression Spain is at the brink of financial breakdown: no press conference, no parliamentary discussion, not a single official explanation on why such a step have to be taken so hastily. The parallel with a War Cabinet confronted with major collapse in the battle front seems all too obvious.

Trying to downsize the problem to just deficit control appears as a stark blunder. With no growth prospect in view, budgetary cuts can only fuel a vicious circle of additional downward pressures and further imbalances. No economy has ever harnessed public finances unless income picks up. True enough, regional spending stands as the main question mark to achieve fiscal consolidation. But out-of-the-way proceedings to bridge the gap, portraits the lack of any articulate plan ensuring economic developments are under firm control. Nervousness hardly serves to reverse ailing confidence. It comes as no surprise that markets have immediately reacted taken bets against Spain.

Spain’s woes mainly stem from bleak worldwide economic outlook. Jobs in the US have stalled while China and other emerging powers are rattling. Meanwhile, Europe seems entangled in a fruitless tug-of-war amplifying its discomfiture. Vulnerable countries like Italy and Spain are taking the brunt of this overall disarray. The only effective shield to save the situation and wait for better days is preserving confidence. Lack to deliver it in a credible way might end up in utter disaster.

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LONDON | Spanish president Mariano Rajoy stepped on to Downing Street but talked instead to the City of London. It will not be the last time that this happens. The shift in the UK’s relationship with most European Union country members should be a troubling sign of the declining power Whitehall and the Houses of Parliament retain amid one of the most crude economic downturns seen in some decades.

Then again, it may come as an unsurprising consequence of a Conservative-led government that has pledged alliance to London’s financial hub in every occasion.

Tuesday’s was Mr Rajoy’s first visit to the UK since taking office in December. He came with a strict agenda and a message to deliver to the investing community, in spite of the British prime minister describing their conversations as focused over trade, cooperation and key global issues. Indeed, Mr Rajoy did not care much about Number 10′s script.

“I paid tribute to the fact that the Spanish have joined the European effort to put in place an oil embargo on Iran,” Mr Cameron said, “I think this is a really positive step forward to show to the Iranian government that they must change course and abandon their plans for nuclear weapons [...] and also that we are working together on sanctions against the Syrian regime.”

The Spanish president uttered not a word about Iran or Syria; he was manifestly uninterested to back up Mr Cameron’s travails to appear closer to his continental neighbours in the European picture, or perhaps didn’t follow his speech.

The lack of coordination between the two leaders during the joint press conference, however, wasn’t entirely linked to the Spanish premier having scarce knowledge of Shakespeare’s language –Mr Rajoy even left unanswered a couple questions made by British journalists. While Downing Street had attempted to frame the meeting within the Coalition’s move to approach positions to other EU partners, Mr Rajoy did not played to Mr Cameron’s European-foreign-policy tune but spoke of a plan to convince the City that Spain’s economy will recover, its net borrowing will be reduced and its credit will be repaid.

“Spain, as very many other countries, has a major objective. Ours is very clear and known to all: to promote economic growth and create jobs, which is tantamount to generating wealth and well being. We need to act on four different lines, but simultaneously.”

He went on to detail all four points, from fiscal austerity to the labour market reform, to the need for the European Central Bank to weigh in by providing liquidity to EU banks, to enhancing competitiveness in an open world:

“We have a fiscal stability law that will receive final approval from our parliament very soon.

“Last Friday, we approved a reform of our labour market. The week before that, a reform of our financial system. These will be four years in Spain, especially this first year, of very many reforms in our economy in order to lay very solid foundations for the future.

PROVINCIALISM AND PROVINCES

Of course, UK’s prime minister had to say it,

“Britain is outside the euro zone. We are not going to join the euro zone,”

but at least Mr Rajoy’s trip would have proved successful in bringing the British leader to acknowledge the extent to which Spanish banks and companies are doing business in Britain –something Britons themselves are not as aware of as all those red-decorated Santander branches throughout London would let one believe.

“There is an incredibly strong relationship between Britain and Spain [...] We have very strong economic ties between our countries, huge UK investment into Spain and massive Spanish investment into the UK. We will be seeing one example of that, Ferrovial, a big contributor to the Crossrail project, this afternoon.”

The Spanish president could not avoid domestic issues, either. A journalist asked Mr Rajoy about the so-called Valencia Spring –a series of civil demonstrations have now for several days occupied the city’s main streets after students complained that the police have tried to prevent their staging peaceful protests when their schools had to switch off the heating to make savings. Images of police officers attacking 14 and 15-year olds have triggered a general sense of outrage in the region.

“As regards Valencia… that issue. We’re going through difficult times and I think right now the best thing for Spain is for everyone to help act as an engine. Everyone, and I include myself, has to make the effort to be up to what’s expected of us. We cannot give an image of our country about what it isn’t.”

President Rajoy was fortunate that most British economic commentators have their plates full of fresh Greek-bailout data to digest. He must not allow overconfidence to take hold of his anti-crisis plans and forget about their social impact. Everybody is watching.

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A critical time as this brings the occasion Spain’s public finances are actually dying for. It is no democratic obscenity to say so and dispose of the decentralisation waste that has been piling up during the last three decades.

Unlike the rest of the worse economic performers among the euro zone member countries, Spain suffers from a regional administrative structure that right now apparently constitutes too high a barrier to demolish on the way to rationalisation of public finances and efficient use of taxpayers’ cash to enhance the economy’s recovery window. Budget austerity falls insultingly heavy on the most vulnerable sector of the society, while Keynesian money injections end lost (or robbed) amid a maze of regional government corridors and their often fake extensions into the business sector –a bleeding wound to real entrepreneurs, decent initiatives from private companies and competitiveness.

Conservative Catalan Economy minister Andreu Mas-Colell should have had a look at the map of the European Regional Development Fund for investment plans in 2007-2013 before defending the current regions’ status quo in The New York Times pages. Economic development within the Spanish state today roughly is as unbalanced as it was in 1978. Just follow the red brick-lane.

“In truth, the largest public budget and deficit and most of the regulatory power over fiscal and expenditure issues lie with the central Spanish administration,” the Catalan minister told NYT readers.

Mr Mas-Culell was disingenuous, at best. Firstly, although the central administration accounts for 5pc of the total deficit to GDP, its deviation has been of 0.2pc, whereas regions’ deviation has reached almost 1.5pc and their deficit is 2.7pc. In other words, autonomies have added €15bn of the total €20bn in excess deficit in 2011 over expectations, according to data Spain’s Treasury is about to release.

Secondly, being Catalonia one of the few regions with a positive fiscal transfer record to the central administration, surely it would have favoured its own interests had things moved on so Catalan money is less required outside Catalonia. But no,

“The matter is a sensitive one, as not everyone in Spain is reconciled to the post-Franco transformation of the country,” Mr Mas-Colell says. “There is now the temptation, with the economic crisis as an excuse, to turn back the clock. On the contrary, what the situation demands is a concerted effort by central and regional administrations for the success of fiscal consolidation.”

We need to talk about administrative consolidation, too, though. This debate will be unpleasant, excruciatingly tedious and the People’s Party and its leader Mariano Rajoy sounds like the least probable facilitator because of its traditionalist ideal of Spain as a nation.

Nevertheless, the past cannot matter more than the future. 17 autonomies are more than one too many, re-arrangements are feasible and doing nothing will be financially suicidal. Diluting Catalonia and the Basque Country in a roulette of regional concocted identities has proved both extravagant and pointless. It is a pity than even those who always excoriated unionist parties for the absurdity of Spain’s devolution architecture will now not let the cat out of the bag, either.

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The Centre of National Intelligence (known in Spanish as CNI), which has been always attached to the Ministry of Defence, is to be dissociated from this institution and to be put under the authority of the Minister of the Presidency, so that the country’s intelligence services will be commanded by the new vice-president as well.

On the other hand, the economy area has also been reorganised: economic affairs are to separate from fiscal policies. The Finance minister will be Luis de Guindos, a well known expert in financial markets who was Secretary of State for Economic Affairs in the former president Aznar’s government, as well as responsible of Lehman Brothers in Spain and Portugal from 2006 to 2008. De Guindos left his position at Lehman when the US parent company collapsed, even though the Spanish subsidiary still returned profits. The Treasury Secretary will be Cristóbal Montoro, who already took this position in Aznar’s cabinet.

There are other Rajoy’s goverment members who also were ministers in previous People Party’s terms. They are Ana Pastor, who then hold the Health ministry, while now she has been assigned to Development, and Miguel Arias Cañete, returning to the restored Ministry of Agriculture. The new minister of Justice will be Alberto Ruiz-Gallardón, who has been Madrid mayor during the last eight years.

According to El País, the Spanish daily with the highest circulation,

“the main features of the new goverment is not the reduction of departments, which is minimal compared to what it was expected, but the attempt to restore a classical structure able to approach the diverse management areas”. The newspaper considers separating economic from fiscal affairs as “a wise move [...] The economic crisis has been one of the reasons that advised this decision, in order to underline the importance of approaching an economic strategy as a whole, in which the fiscal policy would be just one part.” The article points out that the new government is completely made up by very near people to the president Rajoy.

The complete list of new Spain’s ministers, as well as their CV can be visited in different media web pages.

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