Eurozone crisis: Spain announces budget cuts amid protests

Spain's government has announced sweeping new austerity measures, amid clashes between protesters and police.

Prime Minister Mariano Rajoy said sales tax would rise from 18% to 21%, and local authorities would have their budgets slashed.

He is aiming to save 65bn euros (£51bn; $80bn) as part of a deal with eurozone leaders to help rescue Spain's banks.

The move coincided with a miners' rally in Madrid, where police fired rubber bullets at crowds of protesters.

Thousands of people joined in the rally to support the miners, who have been campaigning for weeks against major cuts to industry subsidies.

Witnesses said protesters out to support the miners threw fireworks, bottles and stones at riot police.

The officers fired rubber bullets and charged at the demonstrators.

Five people were arrested and three people suffered minor injuries, according to the AFP news agency.

'Circumstances change'

The prime minister, interrupted several times by opposition MPs, told parliament that the changes he was announcing had to be adopted without delay.

Eurozone finance ministers have agreed to provide 30bn euros (£24bn) for Spain's troubled banks by the end of the month and to give Madrid an extra year - until 2014 - to hit its budget targets.

Mr Rajoy acknowledged that the VAT rise contradicted a campaign pledge made before his Popular Party came to power. As recently as January he said there was no plan to raise the tax.

"I said I would lower taxes and I am actually raising them. Circumstances change and I have to adapt to them."

The package of measures would cut the budget by 65bn euros over two-and-a-half years, he said.

"The excesses of the past are being paid for right now," he said, adding that Spaniards had never before experienced such a recession.

Without a cut in Spain's budget deficit, public services would be put at risk, he said. Savings of 3.5bn euros will be made to government administration budgets, with local authorities banned from offering services they cannot afford and the number of councillors reduced by 30% in some areas.

The door had been opened to a new EU model, Mr Rajoy said, and the summit agreements had committed everyone equally.

Spain's unemployment is running at more than 24% and analysts say European leaders want to see a credible Spanish plan for viability and deficit reduction.

"What animates us is the five million people out of work," Mr Rajoy told parliament.

The European Commission praised the Spanish government's "determination" and swift action.

"It's an important step to ensure that the fiscal targets for this year can be met," spokesman Simon O'Connor told reporters.

Mass rally

Thousands of miners marched through the centre of Madrid towards the industry ministry to protest against plans to slash coal industry subsidies from 301m euros last year to 111m euros this year.

Crowds lined the streets of Madrid to welcome the coal miners

"It's just cuts and more cuts," David Menendez, a miner from Asturias, told the Associated Press news agency. He and his colleagues had been further angered by the latest round of tax increases and spending cuts.

Many of the workers had walked hundreds of miles since 22 June from northern Spain, where demonstrations outside coal mines have resulted in clashes with police.

Unions say the cuts threaten 30,000 jobs and could destroy their industry.

The Spanish government argues that it pays disproportionately high subsidies to a small and unprofitable part of the economy.

Spain's 30bn-euro bank bailout will be the first instalment of a package worth up to 100bn euros agreed in June.

Eurozone ministers must get approval from their own parliaments and hope to make the payment by the end of July.