Spain to Cut Spending, Boost Taxes

Spanish Prime Minister Mariano Rajoy announced 14.9 billion euros ($19.3 billion) of deficit cuts, with the government’s finances in worse shape than expected and the budget shortfall exceeding European Union forecasts.

The deficit this year will reach 8 percent of gross domestic product, requiring tax increases of 6 billion euros and spending reductions of 8.9 billion euros, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid. Spain will finish the year with a budget gap twice that forecast for Italy and more than four times Germany’s shortfall.

The stepped up austerity to avoid a bailout may derail Rajoy’s aim of trimming the country’s rising debt while spurring a shrinking economy that’s being choked by Europe’s highest unemployment rate. Joblessness of 22 percent helped drive former Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party from power in the Nov. 20 elections, when Rajoy won the biggest parliamentary majority in three decades.

The yield on Spain’s 10-year benchmark bond fell 7 basis points to 5.097 percent at 4 p.m. in Madrid. Spanish bonds have been Europe’s best performers since the election, gaining 8 percent since the Nov. 20 vote and providing Rajoy with breathing space in his task of funding more than 36 billion euros of maturing debt in the first quarter. Spain is scheduled to hold its first bond auction of 2012 on Jan. 12.

Photographer: Denis Doyle/Bloomberg

Spanish Prime Minister Mariano Rajoy. Close

Spanish Prime Minister Mariano Rajoy.

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Photographer: Denis Doyle/Bloomberg

Spanish Prime Minister Mariano Rajoy.

Higher Taxes

The government plans to raise tax on income, interest on savings and on high-value homes and maintain a freeze on civil servant wages. Pensioners will receive a 1 percent increase, a move that will cost 1.4 billion euros, and the government will also maintain a special 400-euro a month unemployment benefit, a popular measures in a country where almost one in four people is jobless.

The 2011 deficit will exceed the former government’s 6 percent target and top the European Commission forecast of 6.6 and the 6.9 percent median prediction by economists surveyed by Bloomberg News.

The measures announced today are to carry the nation through until a 2012 budget is presented and approved before March, 31. Rajoy will need to find additional savings to meet the goal of trimming the deficit to 4.4 percent of GDP next year and 3 percent in 2013.

The government missed its deficit target due mostly to bigger shortfalls in Spain’s 17 autonomous regions, Budget Minister Cristobal Montoro said. The PP now rules in the majority of those region’s and will have to figure out how to cut those budget gaps amid a shrinking tax base to be able to meet its future deficit targets. The PP has a chance to gain control of Andalusia, the country’s most populous region and a Socialist stronghold, in regional elections in March.

To contact the reporter on this story: Angeline Benoit in Madrid at +34-91-700-9617 or abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at +44-20-7673-2841 or cstirling1@bloomberg.net

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