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Spain's Deputy Prime Minister Soraya Saenz de Santamaria holds a news conference after a cabinet meeting at Madrid's Moncloa Palace.

JUAN MEDINA/JUAN MEDINA/REUTERS

Spain's new government said on Friday the public deficit for 2011 would come in at 8 per cent of gross domestic product, well above a target of 6 per cent, and announced income and property tax hikes and a civil servant wage freeze in response.

Spain has been under market scrutiny about its ability to control public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the euro zone debt crisis has spread.

Deputy Prime Minister Soraya Saenz de Santamaria in the new centre-right government outlined public spending cuts worth €8.9-billion ($11.5-billion U.S.) to tackle the deficit.

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"We're facing an extraordinary and unexpected situation, forcing us to take extraordinary and unexpected measures," Ms. Santamaria said.

While Italy's debt mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better, although it too has been hit with high borrowing costs.

The previous Socialist government cut the budget shortfall from 11.2 per cent of gross domestic product in 2009, and the conservatives must take up the baton and bring the deficit down to 4.4 per cent in 2012 and 3 per cent in 2013.

The conservatives, who swept to victory in November amid dissatisfaction over the Socialists' handling of the crisis, have pledged to turn the economy around while reforming a broken labour market and pulling the country out of a prolonged slump.

New Treasury Minister Cristobal Montoro announced tax hikes on Friday that will focus on the wealthy, raising around €6-billion.



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