Spain Rules Out Tax Hikes to Meet 2014 Budget Goals

Spanish Budget Minister Cristobal Montoro ruled out further tax increases for next year, banking on a return to growth to trim the European Union’s widest deficit.

The government forecasts the economy will grow 0.7 percent, trimming the unemployment rate to 25.9 percent. Economic growth will bolster revenue, and the government plans an overhaul of tax rules next year after a review, Montoro said at a press conference in Madrid today after the cabinet approved the 2014 budget.

Prime Minister Mariano Rajoy, who has seen his public support tumble as a corruption scandal compounded discontent at his austerity policies, is betting that the end of a six-year slump will help Spain comply with EU deficit rules after posting the bloc’s largest shortfall last year. The European Central Bank and the International Monetary Fund have raised doubts about Spain meeting this year’s goal, while the EU forecast in May Spain’s budget deficit will rise to 7 percent next year compared with a target of 4.5 percent.

“It’s going to be a recovery without consumption and without jobs so that doesn’t help your tax revenues,” Jose Carlos Diez, a professor of economics at ICADE (ICAD) University in Madrid, said in a telephone interview.

Deficit Reduction

Domestic demand will continue to drag on GDP, contributing a negative 0.4 percent, the government’s forecasts show. Exports, which don’t generate sales-tax revenue, will rise 5.5 percent after a 5.7 percent increase this year. The budget is based on a 10-year bond yield of 4.3 percent, where it’s trading now, and the euro at $1.33.

“Next year it will be easier to reduce the deficit because there will be more growth and so more income,” Rajoy said in an interview with Bloomberg Television this week.

The government also passed a law to sever the link between inflation and administered prices, to avoid second-round effects. The bill excludes pensions and wage bargains, Economy Minister Luis de Guindos said.

Spain is due to send its budget plans to the European Commission this month for the EU to assess its chances of bringing the deficit back within the bloc’s 3 percent limit by 2016. The shortfall rose to 10.6 percent last year after the country received EU aid to bail out its banking sector. Excluding bank aid, the deficit was revised down to 6.84 percent today from 6.98 percent.

Still, ECB President Mario Draghi’s commitment to protect the euro and signs of a recovery in Spain have helped push down its borrowing costs. The yield on it’s 10-year benchmark bond was little changed at 4.34 percent at 2:22 p.m. in Madrid. That compares with a euro-era high of 7.75 percent percent a little over a year ago.

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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