Spain Raises Taxes on Higher Earners, Cuts Spending to Contain Budget Gap

Spain will raise taxes on the highest earners and cut spending in the most austere budget in at least three decades to slash the euro region’s third-largest deficit. The government raised its jobless forecast and left its economic-growth estimate unchanged.

The budget creates two new brackets for taxpayers earning more than 120,000 euros ($161,120) and 175,000 euros that will generate as much as 200 million euros, Finance Minister Elena Salgado said in Madrid after the Cabinet approved the plan today. Spending will fall about 3 percent from 2010 she said.

“The amounts that the ministries will have at their disposal for the spending they need to carry out will be the equivalent of what they had in 2006,” she told reporters.

Spain’s Socialist government is trying to show it can trim the deficit to 6 percent of gross domestic product next year from 11 percent in 2009 without strangling an economy that’s emerging from an almost two-year recession. The task has become more urgent as doubts resurface about high-deficit euro members’ finances. The perceived riskiness of Portuguese and Irish bonds rose to euro-era records today.

“While the government appears to have made inroads into its budget deficit this year, there remains a risk that growth is weaker than the government expects in 2011, potentially leading it to slip behind target,” said Ben May, an economist at Capital Economics in London.

The budget creates two new brackets for taxpayers earning more than 120,000 euros ($161,120) and 175,000 euros that will generate as much as 200 million euros, Finance Minister Elena Salgado said in Madrid after the Cabinet approved the plan today. sPhotographer: Denis Doyle/Bloomberg Close

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The budget creates two new brackets for taxpayers earning more than 120,000 euros ($161,120) and 175,000 euros that will generate as much as 200 million euros, Finance Minister Elena Salgado said in Madrid after the Cabinet approved the plan today. sPhotographer: Denis Doyle/Bloomberg

Growth Forecasts

Salgado stuck to forecasts for GDP growth of 1.3 percent next year, more than twice the 0.6 percent forecast by the International Monetary Fund. The plan also maintains targets for deficit reduction, while predicting a lower debt than outlined in February. Unemployment, now the highest in Europe at 20.3 percent, will be 19.3 percent in 2011, more than the previous forecast of 18.9 percent.

The central government shortfall fell by almost half to 2.4 percent in the first seven months of the year, according to Finance Ministry data. The overall public budget used in international comparisons includes regional administrations’ shortfalls and the balance of the social security system.

Salgado reduced her forecasts for the overall public debt burden to 62.8 percent of GDP this year and 68.7 percent in 2011. In February she had forecast debt would amount to 71.9 percent in 2011. Non-financial spending will fall 7.9 percent compared with levels initially budgeted for 2010.

Risk Premium

The extra yield that investors demand to hold Spanish 10- year bonds rather than similar maturity German fell to 180 basis points from 184 basis points yesterday.

Portugal’s risk premium with Germany reached a euro-era record 419 basis points today, more than twice the Spanish level. Spain’s spread has narrowed from its record of 232 basis points on June 17.

The budget will go to parliament on Sept. 30, where the ruling Socialists lack a majority and are seeking the support of the Basque Nationalist Party.

The central government, which controls half of income taxes, leaving the rest under the jurisdiction of regional administrations, will raise its rate on incomes above 120,000 euros to 22.5 percent from 21.5 percent; on incomes above 175,000 euros, the rate rises to 23.5 percent. Some regions, including Andalusia, have already created new brackets for high- earners. Spain’s highest tax bracket, combining both national and regional rates, is 43 percent.

Regional Spending

Spain’s regions control around half as much spending as the central government, with responsibility for health and education, and employ half of all public workers. The government said today it approved plans for three regions to borrow as much as 1.9 billion euros.

While the central government’s shortfall is shrinking, the regions pose a threat to the overall public-deficit targets, said Raj Badiani, an economist at IHS Global Insight.

“Its 17 regional governments are struggling to deliver widespread spending cuts as part of the government’s austerity plan,” he said in a note.

Prime Minister Jose Luis Rodriguez Zapatero took measures in May to knock 10 billion euros off next year’s deficit, in a policy U-turn agreed to as part of the creation of an almost $1 trillion financial backstop for euro nations hit by contagion from Greece’s fiscal crisis. Zapatero slashed public wages 5 percent, announced a freeze on all but the lowest pensions in 2011 and scrapped subsidies for new mothers.

As the country aims to cut the deficit by the most since at least 1980, its coffers will also get a boost next year from a sales-tax increase that came into effect in July.

The government stuck to its plan to reduce the shortfall to 6 percent next year, 4.4 percent in 2012 and 3 percent in 2013, in line with the European Union limit. It revised the 2009 deficit down to 11.1 percent from a previous 11.2 percent.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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