Sun, Jan 01, 2012 - Page 11 News List

Spain’s deficit bigger than expected

Reuters, MADRID

Spain’s new government said on Friday that last year’s budget deficit would be much larger than expected and announced a slew of surprise tax hikes and wage freezes that could drag the country back to the center of the eurozone debt crisis.

In its first decrees since sweeping to victory in November, the center-right government said the public deficit for last year would come in at 8 percent of GDP, well above an official target of 6 percent.

It announced initial public spending cuts of 8.9 billion euros (US$11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year to tackle the shortfall.

“This is just the beginning ... We’re facing an extraordinary and unexpected situation, forcing us to take extraordinary and unexpected measures,” Spanish Deputy Prime Minister Soraya Saenz de Santamaria said.

Spain has been under market scrutiny over its ability to control its public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the eurozone debt crisis spread.

Ten days ago, the Spanish Treasury said the central government budget deficit was on course to meet a full-year target of 4.8 percent of GDP, which analysts said would push Spain’s overall public deficit above its 6 percent target for the year.

However, the scale of the overshoot took some economists by surprise and led them to forecast a deeper recession, ending the year on a downbeat note for the eurozone as a whole.

“This is a strong shock. I didn’t expect this kind of deficit increase. How can we achieve the objective using personal income taxes and capital taxes? This means making the recession much worse,” Barcelona ESADE university economist Robert Tornabell said.

While Italy’s debt mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better. Measures taken by the previous Socialist government, while costing it the election, have kept the markets from pushing Spanish yields to unsustainable levels.

However, as recession looms across the eurozone, the new government faces a rocky few years. After Friday’s initial round of tax hikes and spending cuts, it plans to unveil a final budget for this year by the end of March.

The Socialists cut the budget shortfall from 11.2 percent of GDP in 2009, and the conservatives must take up the baton and bring the deficit down to 4.4 percent this year and 3 percent next year. If the final deficit for last year hit the 8 percent mark, as the conservatives expect, the government will need to make total savings worth more than 35 billion euros this year to meet the official target.

Spain’s economy, the fourth-largest in the eurozone, is likely to have shrunk as much as 0.3 percent in the fourth quarter, Spanish Economy Minister Luis de Guindos said this week, and many economists expect output to keep shrinking in the early part of this year.

The collapse of the property market after the 2007 global credit crunch and shrinking consumer confidence have hit the economic cornerstones of construction and services, leaving Spain struggling to grow since emerging from recession in 2010.

Now, the eurozone debt crisis and fear of an economic slump across the bloc has hit Spanish export growth, the only element of the economy to promote growth through last year.

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