Spain's Parliament To Debate Austerity Package

Members of the Spanish parliament are cutting their vacations short for an emergency debate on the government's austerity plan. Spain's huge debts are contributing to the financial chaos in Europe, and the Spanish government is trying to find a balance between stimulus and deficit reduction, ahead of an upcoming election.

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In neighboring Spain, lawmakers are cutting their summer vacations short and scrambling back to Madrid today. Spain is one of the European countries that's accumulated huge debts, causing market instability and putting pressure on the euro. The Spanish parliament will debate a new austerity package that aims to reduce the country's budget deficit and jumpstart growth. Lauren Frayer reports from the Spanish capital.

LAUREN FRAYER: It's a question being asked on both sides of the Atlantic: Can lowering taxes stimulate the economy? Spain's socialist government thinks so, at least when it comes to home sales. It plans to slash sales tax for new homes in half, down from 8 percent to just 4. Spain has more than 700,000 new houses built but never sold, left over from the years when credit was cheap and mortgages aplenty.

Housing developers hope the tax cut will help them unload those houses and also, lighten debts to Spanish banks. But with more than one in five Spaniards unemployed, job seekers like Ricardo Gutierrez say they can't even afford a downpayment.

Mr. RICARDO GUTIERREZ: I don't care if it's 8 or 4 percent, because I don't get the money. Maybe for the people have money, rich people, they can get a house and it's better for them.

FRAYER: The tax cut is part of a new economic package, part stimulus but mostly austerity, due to be ratified by Parliament. It also include extending prescriptions for cheaper generic drugs in Spain's national health-care system, early tax collection for some large corporations, and reducing tax credits.

Gayle Allard, an economist at Madrid's IE Business School, says Spain's government seemed like it was in denial about the economy for years and now, it's scrambling to implement austerity measures three months before an election.

Ms. GAYLE ALLARD (Economist): For so long, we've been saying the government isn't doing anything. So when they finally do something, I hate to say it's the wrong thing or it's too little, too late. But that, unfortunately, is the case. They need structural reform. They need labor market reform. But that's kind of like, you know, talking about a gas tax or something in the United States. You can't talk about it. It's political poison.

FRAYER: Allard says Spain really needs to reform its two-tiered labor system, in which workers get either temporary contracts or a job for life. She says lowering consumption taxes, like the one on home sales, doesn't do much if the country is already broke.

Ms. ALLARD: The real problem with Spain is this very, very high unemployment rate. And until that comes down, people are not going to feel comfortable consuming. They're saving like crazy because they're afraid they won't have jobs in the future. So you know, you have a similar situation to the United States here that's more focused on the housing market, but the causes are a lot deeper than, you know, a value-added tax on homes.

FRAYER: Twenty-nine-year-old Alberto Gomez is an engineer who says he feels lucky to have a job. That's not the case for many of his friends. When the housing bubble burst here, it left behind more than just empty, unsold homes. It left behind a generation of workers, many of whom skipped university because they could make more money in construction. Now, unemployment for people in their 20s is at 45 percent.

Mr. ALBERTO GOMEZ (Engineer): It's very easy to grow the economy with construction. You don't need research and development. You don't need very high qualification. You only have to build and build.

FRAYER: Gomez is frustrated, and plans to take that sentiment to the polls. A Spanish election is looming November 20. The ruling Socialists are hoping some of these austerity measures can pay off before then. But polls predict the opposition Conservatives will take control.

For NPR News, I'm Lauren Frayer in Madrid.

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