Spain's new 65-billion-euro ($80-billion) austerity package will trim a bulging public deficit but the price could be a biting recession lasting up to 2014, analysts say.
Fresh from winning European Union agreement on relaxed deficit-cutting goals, Prime Minister Mariano Rajoy revealed Wednesday a slew of tight-fisted measures demanded by Brussels.
Among them: value added tax goes up to 21 percent from 18 percent, jobless benefits are being reduced, government workers' salaries trimmed, and a tax rebate for home buyers scrapped.
Announcing the measures, Rajoy said the economy would shrink by nearly two percent this year, and he conceded that most analysts pointed to recession in 2013, too.
Edward Hugh, economist based in Barcelona, said the measures would help Spain to meet its new relaxed targets of cutting the public deficit from 8.9 percent of economic output last year to 6.3 percent this year, 4.5 percent next year and 2.8 percent in 2014.
"Can they comply with the deficit? It is more possible that they could comply with the deficit but it is not certain," Hugh said.
"The impact of this is to deepen Spain's recession this year, probably guaranteeing negative growth next year and we will see where we are by the time we get to 2014," he added.
"I would not rule out that this could spread into 2014 now", Hugh said, saying the economy could contract by 2.0 percent this year, 1.0 percent in 2013 and then 0.3 percent in 2014.
Spain could benefit hugely from plans for the 17-nation eurozone's bailout mechanism to inject capital directly into stricken banks and possibly buy the bonds of troubled economies in the region, he said.
"The good news is obviously the direct recapitalization of the banks, which I do think is a landmark decision in the European debt crisis because it is the first time that there has been potential debt sharing," Hugh said.
"So that is good news for the banks but for the rest of the Spanish population the situation looks rather different because it is all bad news," he added.
"They have got taxes going up, unemployment benefit being cut, public servants are having some salary loss and on the other side Spain's small savers are going to get their savings chopped by the restructuring of preference shares."
Many bank customers bought preference shares offered by their banks, and a large proportion say they had little idea of the risks, believing it was just a new way of saving.
But under a memorandum of understanding agreed with Brussels in return for a banking rescue loan of up to 100 billion euros, Spain agreed that banks and their shareholders would take losses "to the full extent possible" before state aid measures are granted.
Economists at Citi Research said the new austerity package, which is in addition to a tough 2012 budget approved in March with 27 billion euros in cuts and tax increases, was "a step in the right direction".
But it would not be enough to restore normal borrowing rates for Spanish goverment debt, it said.
"The measures are simply necessary to obtain political agreement from euro area creditor countries to continue and possible extend support measures," Citi Research said in a report.
The austerity package underlined the group's expectations that Spain's recession would deepen and continue in 2013, it said.
Spain's budget deficit target for this year was now more realistic, Citi Research said, but for 2013 the fiscal targets "still look very ambitious to us".
Spanish brokerage Renta 4 said it was now focused on a meeting between the government and the nation's 17 powerful regional governments, which are struggling to finance their debts on the markets.
The government is widely expected to agree to let the regions pool their debt in 'hispabonos' to be guaranteed by Madrid in return for stricter surveillance of their spending.