Spain slashes state spending in effort to stop euro crisis

Spain will cut state spending and employees' wages in an attempt to reassure markets that it can get its budget deficit under control and halt the spread of the European debt crisis.

"We need to make a singular, exceptional and extraordinary effort to cut our public deficit and we must do so now that the economy is beginning to recover," Prime Minister Jose Luis Rodriguez Zapatero told parliament.

Zapatero said the government planned to save 15 billion (£12.7 billion) this year and next, which includes a reduction of more than 6 billion in public investment.

Civil service salaries will be cut by 5% this year and frozen in 2011, sparking immediate anger from unions, who have stopped on a government move to raise the retirement age to 65 from 67.

"These moves confirm the government is bent on harsh austerity. It's a departure from the prime minister's line-up until now and is going to mean a change for relations with the unions", said Candido Mendez, head of the second-largest union confederation, the UGT.

The European Union and International Monetary Fund officials agreed at the weekend on a 750 billion emergency fund for financially weak eurozone countries.

"After the weekend EU meeting it became very clear Spain and Portugal, and particularly Spain, would have to go the extra mile in cutting the deficit," said Jose Garcia Zarate, an economist at 4Cast. "So they have done this, based on the Irish model."

He said the cuts were "taking place where it hurts," above all on civil servants' pay.

The pressures on Zapatero to act rose as US President Barack Obama urged him yesterday to be "resolute" in efforts to implement economic reforms.

The measures will reduce the budget deficit to 9.3% of gross domestic product this year, from 11.2% in 2009. It will fall to 6% in 2011 and be reduced to 3% of GDP by 2013, the government said.