Spain has announced a $79.85bn austerity package that includes tax hikes and spending cuts a day after it won approval from its euro partners for a huge bailout of the country's stricken banks.
Prime Minister Mariano Rajoy told parliament on Wednesday the country's future was at stake as Spain grapples with recession, a bloated deficit and investor wariness of its sovereign debt.
He said the nearly $80bn in savings will be achieved through 2015 by a hike in sales taxes and a series of spending cuts through 2015.
Rajoy explained that the austerity measures were conditions European Union partners demanded in exchange for an emergency bailout of Spain's troubled banks.
He outlined cuts in unemployment benefit and civil service pay and perks in a parliamentary speech interrupted by jeers and boos from the opposition.
"These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billions of euros," Rajoy told parliament.
'A crucial moment'
He also announced new indirect taxes on energy, plans to privatise ports, airports and rail assets, and a reversal of property tax breaks that his party had restored last December.
However, he did not touch pensions - keeping one election promise - and said the tax burden was being shifted from direct taxes on labour and income to taxation on consumption.
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Rajoy said that he would raise the main value-added tax by 3 percentage points to 21 per cent, something he had previously assured the public would never be done.
The reduced rate will rise to 10 from 8 per cent in a move that could further depress consumer spending.
"We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes," he said. "That is the reality. We have to get out of this mess and we have to do it as soon as possible."
Spain's 16 eurozone partners agreed to provide $122.9bn in a rescue package for Spanish banks laden with toxic assets following the bursting or a real estate bubble with the onset of the international financial crisis in 2008.
The country's high deficit and weak banks are now at the centre of the euro zone's debt crisis as investors fret that Spain could join Greece, Portugal and Ireland in needing a sovereign bailout.
Madrid's borrowing costs have soared in recent months, with the yield on the 10-year government bond breaching the 7 per cent level regarded as unsustainable in the long run.
On Wednesday, that yield fell to 6.81 per cent.
Rajoy has already approved a series of tough financial and labour reforms since taking office last December.
With five years of economic recession, 24.4 per cent unemployment and tax income falling, Spain is struggling to meet tough deficit cutting targets that it has agreed on with the European Union.