SPAIN’S GOVERNMENT yesterday hinted at further austerity measures, including labour reform and tax increases, amid continuing market jitters about the euro zone’s future unity.

María Teresa Fernández de la Vega, the deputy prime minister, said the government hoped to unveil “within the next few days” an agreement with workers and employers on changes to rigid labour rules.

Spain is among a group of European countries under pressure to reduce double-digit budget deficits.

Madrid this week announced an average 5 per cent public sector pay cut as part of a broader push to slash a budget deficit of 11.2 per cent of GDP. The measure angered unions, which plan a series of protests, but was well-received by business leaders, economists and other commentators.

The new measures – which also include a pension freeze and the abolition of one-off payment for having a baby – followed the agreement last weekend of a €750 billion rescue package for weaker euro zone members.

Speaking after the weekly cabinet meeting, Ms Fernández de la Vega also refused to rule out tax increases for the rich. “Those who are wealthier are in a position to contribute more,” she said.

Her comments came as Spain’s national statistics institute revealed that the country’s core price index fell year on year in April for the first time since 1986, reviving fears of a deflationary trend.

Underlying inflation – which excludes volatile energy and fresh food prices – was a negative 0.1 per cent in the month, after climbing 0.2 per cent in March. The data could be bad news for Spain, which recently showed signs of crawling out of a recession that has lasted two years.

José Manuel Campa, the deputy finance minister, played down the threat of deflation, describing the data as a “one-off”. – (Copyright The Financial Times Limited 2010)