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Spain’s plan to raise taxes, cut spending menace recovery

05 July 2012   (0 Comments)
Posted by: SAIT Technical
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By Andres Gonzales and Julien Toyer (Business Report/Reuters)

Spain’s government was putting finishing touches to a package of up to e30 billion (R307bn) in spending cuts and tax hikes to help it meet this year’s deficit targets, sources with knowledge of the matter said yesterday.

Running over several years, the programme could involve raising Spain’s main consumer tax, a new energy levy, reforms to the pension system, pay cuts for civil servants, new motorway tolls and another reduction in ministry and regional spending, the sources said.

Some measures may be announced next week, when the EU is likely to grant the government an extra year to cut its deficit below 3 percent of output, and others could be presented over the summer and included in a multi-year budget plan due to be prepared next month.

Spain’s highly indebted regions and banks badly hit by a property crash four years ago have put the country firmly in the sights of investors who fear that, given its size, it could derail the entire single currency project if its economy collapses.

The new austerity drive aims to put Spain back on track to meet its deficit goals for 2012, though some questioned whether it would add to the country’s problems by entrenching its recession more deeply.

Data for the first five months of the year revealed spending and revenue slippage that makes the current objective unattainable without new cuts.

"The idea is to implement cuts worth 3 percent of gross domestic product (GDP). Everything is under review,” said one of the sources with knowledge of the government’s thinking.

With Spain’s nominal GDP totalling about e1 trillion a year, the cuts would be worth up to e30bn over several years and would come on top of savings plans of about e48bn.

"The idea is to cut the cost of the public service, freeze pensions, cut unemployment benefits,” the source said, adding that an increase in sales tax was a matter of intense debate.

Three other sources confirmed the measures were being looked at but said no decision had been taken yet on specific reforms or cuts, and that the package could fall under e30bn.

Spain is negotiating a European rescue of up to e100bn for its banks and pressing for an EU intervention on its bond market to cut soaring borrowing costs.

But it is unclear if the new austerity plan will be well received by markets wary that too much belt-tightening will choke off any hope of recovery.

"More austerity will only make things worse in the short term,” said Nicholas Spiro, from Spiro Sovereign Strategy.

"The market does not need to be convinced that (Prime Minister Mariano) Rajoy’s government is serious about fiscal retrenchment… the real worry is the lack of growth,” he said.

The European Commission and the International Monetary Fund said Spain should not rush to cut its public deficit after the economy fell into its second recession in three years in the first quarter.



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