Spain steps up austerity amid protests

As part of the measures, announced on Wednesday by Mr Rajoy in parliament, value added tax will be increased from 18 per cent to 21 per cent, unemployment benefits will be reduced and an attempt will be made to rationalise Spain's sprawling local governments.

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As he spoke, thousands of miners marched through the centre of Madrid in protest at the austerity measures, particularly a 60 per cent cut in coal subsidies which they say will force mines to close. Some had spent weeks walking nearly 300 miles from the north of the country before Wednesday's demonstration in the capital.

The march turned violent, however, when riot police fired rubber bullets directly at miners, relatives and sympathisers who had joined the protest as they gathered outside the industry ministry after marching up Madrid's main north-south avenue.

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The increase in VAT is a volte-face for Mr Rajoy, who stood against tax increases made by the previous Socialist government of José Luis Rodríguez Zapatero when the now ruling Popular party was in opposition.

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Public funding for trade unions and political parties will be reduced 20 per cent, while property tax breaks will also be removed.

State-owned airport and railway assets may also be sold, Mr Rajoy said, raising the prospect of the cancelled privatisation of Madrid and Barcelona airports launched under Spain's previous government being revived.