Spain announced its new budget which cuts government spending substantially and is expected to reduce Spain's budget deficit to an acceptable level. The government hopes that this will please investors. The Spanish stock index rose on the news but its cost of debt service has been rising to levels well above Germany's risk free interest rate.
Spain will provide another test of the belief that fiscal austerity will reduce the deficit to GDP ratio. The ratio may worsen if slow growth leads to lower tax revenues and a larger deficit.
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