Spain Announces Tough New Austerity Measures Javier Soriano/Agence France-Presse - Getty Images Prime Minister Mariano Rajoy warned of more pain for Spaniards. MADRID - Struggling to meet euro zone financial targets, Prime Minister Mariano Rajoy of Spain introduced his latest package of tough austerity measures Wednesday, including a rise in the sales tax, reversing his previous stance. The package, Mr. Rajoy's fourth set of budget measures in seven months, is intended to reduce the budget deficit by €65 billion, or $80 billion, over two and a half years. It follows a decision by European Union finance ministers Tuesday to relax Spain's deficit target for this year to 6.3 percent of gross domestic product, rather than the 5.3 percent target that was set only four months ago. But the finance ministers also said they expected Madrid to continue showing progress on its deficit cutting. "This situation is dangerous, very dangerous," he said in an interview with Finland's biggest daily, Helsingin Sanomat. One of the main elements of the new round of Spanish austerity measures is a rise in the value-added tax to 21 percent from 18 percent. Mr. Rajoy's government had previously argued against raising the tax amid concerns that it would deepen Spain's recession by stifling consumer spending. But the latest budget data indicated that Spain needed to try generating further tax revenue if it wanted to come close to meeting its deficit pledges. The circumstances have changed, and I have to adapt. Besides being politically unpopular in Spain, the further budget measures could undermine the country's ability to revive the economy, in many analysts" view. But Mr. Rajoy finds himself in an increasingly tight bind between Spanish voters and Spain's partners in the euro zone. "Growing and creating jobs isn't possible today," Mr. Rajoy told Parliament. The speed with which Mr. Rajoy acted was welcomed by the European Commission, which is in charge of policing E.U. rules on budget discipline. "It's an important step to ensure that the fiscal targets for this year will be met," said Simon O'Connor, spokesman for Olli Rehn, commissioner for economic and monetary affairs. Although a European Union summit meeting last month had brought some calm to jittery financial markets, doubts have grown in recent days, forcing the borrowing costs of Spain, and potentially Italy, back up to levels seen as unsustainable. And despite the decision by euro zone finance ministers on Tuesday to make available by the end of the month €30 billion of the €100 billion of rescue assistance for a Spanish bank bailout, financial markets remain wary. That makes it far from clear that euro zone leaders have done enough to keep the currency buoyant over the summer break. The memorandum of understanding indicates that holders of hybrid capital and subordinated debt in state-rescued banks will have to take a trimming of their investments in order to minimize the cost to taxpayers of the banks" restructuring. That means small shareholders - bank customers, in many cases - will be affected. Speaking to reporters Wednesday, Mr. Rehn's spokesman said of the draft details of the Spain bank bailout: "We will work on the principle that private sector participation in the distribution of losses is necessary to ensure that taxpayers do not have to shoulder an unfair burden. This is consistent with the approach that we have applied in state aid controls since the beginning of this crisis.