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Bank of Spain Says Rajoy Risks Budget Deficit Goal Miss

Bank of Spain Says Rajoy Risks Missing Budget Deficit Targets
Spain increased the value-added tax from Sept. 1 as part of a package of measures announced in July to correct a three-month-old budget. Photographer: Angel Navarrete/Bloomberg

Bank of Spain Governor Luis Maria Linde said the government risks missing its budget targets this year and next, adding to doubts on Prime Minister Mariano Rajoy’s ability to cut the deficit amid a five-year slump.

The data “doesn’t allow us to rule out the possibility of some slippage,” because the target depends on tax measures kicking in at the end of this year, Linde said in the Senate in Madrid today. “Meeting the 2013 objectives could be put in danger if tax collection was affected by lower economic activity.”

Rajoy is trying to reduce the deficit by two thirds in three years even as he forecasts the economy will continue to contract next year amid a 26 percent unemployment rate. While the European Commission told Spain last week its budget measures were sufficient, Moody’s Investors Service said the EU’s stance was “credit negative” for Spain, which it rates one step above junk. Linde said the deficit targets should not be eased.

“It is crucial to dissipate doubts over the capacity to control the upward trend of public debt,” Linde said.

Tax Increases

Spain increased the value-added tax to 21 percent from 18 percent from Sept. 1 as part of a package of measures announced in July to correct a three-month-old budget. As part of the same package, it scrapped a Christmas bonus for public workers equivalent to a month’s salary.

“Meeting the target will depend on numerous tax measures, with an impact in the last quarter ending up yielding the expected results, and that compensates for the expansion in spending on interest, jobless benefits and pensions,” Linde said. “It should be expected that possible slippage in some areas can be offset with possible adjustments in others.”

Miguel Ferre, deputy minister for tax told reporters at the same hearing that the government isn’t working on any precautionary measures to be used in case of slippage, and Deputy Budget Minister Marta Fernandez Curras said the government is on track to meet its target.

Fernandez Curras also said “there’s room” in the budget to update pensions this year, while declining to say whether the government can afford to compensate pensioners for headline inflation that was 3.5 percent last month. The Bank of Spain estimates that bringing pensions in line with the cost of living would cost about 3 billion euros, and Linde said today that pension spending should be “closely watched” next year.

The 2013 budget, which seeks to cut the deficit to 4.5 percent of gross domestic product, is making its way through the lower and upper houses of Parliament for final approval by the end of the year.

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