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Spain Raises Tax, Sets Pension Deadline Amid Contagion

Spain's Finance Minister Elena Salgado
The Cabinet passed an increase in the tax, which will raise 780 million euros ($1 billion), and pledged to send a pension bill to Parliament on Jan. 28, Finance Minister Elena Salgado told a news conference today. Photographer: Denis Doyle/Bloomberg

Spain’s Cabinet raised tax on tobacco and set a date for a pension overhaul as the Socialist government tried to stem contagion from the Irish crisis that sent its bond yields to the highest in a decade.

The Cabinet passed an increase in the tax, which will raise 780 million euros ($1 billion), and pledged to send a pension bill to Parliament on Jan. 28, Finance Minister Elena Salgado said today after a weekly meeting. It also approved measures announced Dec. 1 including the sale of stakes in the lottery and airports operator, and a reduction in taxes on small- and mid-sized companies. The government will let an unemployment subsidy that was created a year ago expire in February.

Spain’s government, which as recently as last week said it didn’t need to take new measures to convince investors it would meet its budget goals, announced the asset sales after Spanish 10-year bonds slid the most in the euro’s lifetime. The government already slashed public wages and froze pensions at the height of the Greek crisis in May, eroding support for Prime Minister Jose Luis Rodriguez Zapatero, who had made welfare a priority since coming to power in 2004.

“Time has run out; we have been talking for months,” Deputy Prime Minister Alfredo Perez Rubalcaba told a news conference in Madrid. “We are going to work even harder to reach agreements.”

Overhaul Delayed

The planned pension overhaul, which includes an increase in the retirement age to 67 years from 65 years, was first announced in January and has been delayed as the government waited for a parliamentary committee to present a report on the proposed changes. Unions, once Zapatero’s allies, oppose the changes and the main opposition People’s Party has also criticized the plans.

The extra yield on Spanish 10-year bonds fell to 218 basis points today from 226 basis points yesterday. It reached 298 basis points on Nov. 30, the highest since the start of the euro, after European finance chiefs agreed to bail out Ireland and open the door to possible debt restructurings in future crises.

The tobacco-tax increase will also help the finances of regional governments, which are suffering from a slump in the real-estate taxes that funded them during Spain’s housing boom. The regional administrations receive 58 percent of the tobacco levy’s proceeds, with the rest going to the central government.

Regional Deficits

With a combined 104.8 billion euros of outstanding debt and control over health and education spending, the regions are trying to rein in their deficits as part of the national plan to cut the overall public shortfall to 6 percent of gross domestic product next year from 11 percent in 2009.

The so-called specific tax rate rises to 12.70 euros per 1,000 cigarettes from 10.20 euros, which is added to a tax of 57 percent of the sale price. The minimum tax resulting from those two levies will now be 116.90 euros per 1,000 cigarettes, compared with a previous 91.30 euros, the Finance Ministry said in an e-mailed statement.

Salgado also said the airport operator, Aena Aeropuertos, will remain a public company, with private investors able to buy only minority stakes. Under the new law, Spain’s 47 individual airports can be managed either as units of Aena Aeropuertos or via private-sector concessions.

Subsidy Axed

The unemployment subsidy set to be scrapped in February was introduced in August 2009, and more than 200,000 people benefited from it in September this year, according to data from the Labor Ministry. The 426 euro-per-month payment is for unemployed workers who have come to the end of their contributions-based benefits, which last a maximum of two years.

There are 1.29 million homes in Spain in which no one is earning, according to the National Statistics Institute, as the economy struggles to recover from an almost two-year recession that pushed the jobless rate to more than 20 percent.

Spending cuts and the highest jobless rate in Europe have dented support for the government. The Socialist Party was defeated in regional elections in Catalonia on Nov. 28, and nationwide the opposition People’s Party has a 7.5 percentage-point lead over the Socialists, according to a poll published by Cadena Ser on Nov. 2.

The government is aiming for tax cuts for small and mid-sized companies to help spur job creation and growth after the economy stalled in the third quarter. Gross domestic product will contract 0.3 percent this year and expand 1.3 percent in 2011, according to the government’s forecasts. The Organization for Economic Cooperation and Development sees a 0.2 percent contraction this year and 0.9 percent growth in 2011.

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