By CIARAN GILESMADRID (AP) â¿¿ Spain is on the mend, Prime Minister Mariano Rajoy claimed Wednesday as he revealed a drop in the government's budget deficit. The government has been trying to heal its public finances since it came to power 14 months ago by slashing spending and raising tax. While that's come at a price for the economy â¿¿ which is in another recession and hobbled by 26 percent unemployment â¿¿ Rajoy noted it was finally bringing the deficit down to less than 7 percent of the country's gross domestic product in 2012, from nearly 9 percent a year earlier. "Spain's head is out of the water," Rajoy told Parliament in what was his first state-of-the-nation debate since taking office in December 2011. As well as problems with the country's economy, Rajoy is also battling allegations that a slush fund was used to pay senior members of his Popular Party. Rajoy said the deficit reduction followed "a readjustment without precedent" in the economy. Official deficit figures are expected over the coming weeks. Spain last year pledged to European authorities it would cut its deficit to 6.3 percent after the 2011 figure was found to have soared to 8.9 percent, nearly three times the limit for European Union countries using the euro currency. In his pursuit of the promised deficit reductions, Rajoy has broken every major election campaign promise, stirring much social unrest and triggering two general strikes over the past 14 months. On Wednesday he admitted he had failed to live up to some promises but insisted he had done his duty. Rajoy promised "a second generation of reforms" that appeared to signal a shift in strategy â¿¿ away from growth-sapping austerity policies in favor of credit incentives and youth employment initiatives The measures include a reduction â¿¿and in some cases elimination â¿¿ of social security payments by companies that hire people under 30 years of age part time. He also announced a â¿¬45 billion ($60 billion) credit program for small and medium-sized companies to be funded publicly and privately.