Spain Raises GDP Forecasts Cutting Taxes Ahead of 2015 Election

Spain’s Cabinet approved a 2015 budget based on higher growth forecasts as the government counts on an economic recovery to trim the European Union’s fourth-largest budget deficit even as it cuts taxes in the run-in to the general election.

The economy will grow 1.3 percent this year and 2 percent in 2015, more than previous estimates of respectively 1.2 percent and 1.8 percent, Economy Minister Luis de Guindos said at a news conference in Madrid today.

Prime Minister Mariano Rajoy has pledged to cut taxes next year, the last of his four-year term. While Spain has emerged from a six-year slump, becoming one of the fastest-growing economies in the euro region, support for his People’s Party has dropped after it pushed through the deepest austerity measures in the nation’s democratic history amid a 27 percent jobless rate.

“Spain is benefiting from the painful reforms of the past few years,” said Robert Wood, an economist at Berenberg Bank in London. “While it needs to keep budget discipline, it’s important to allow the economy room to grow rather than smothering it in austerity.”

Spain’s budget watchdog, set up as a condition of its 2012 bank bailout, said that the forecasts were “credible.”

Rising Revenue

Budget Minister Cristobal Montoro reiterated his commitment to reduce the deficit to 4.2 percent of gross domestic product in 2015 from 5.5 percent in 2014, in line with Spain’s commitments with its EU partners. The shortfall last year was revised to 7.1 percent of GDP after four years of being close to 10 percent.

Tax revenue this year will reach 177 billion euros ($225 billion), compared with 180 billion euros forecast in the budget, Montoro said. Tax income will rise to 186 billion euros next year.

Six straight years of budget slippage have more than doubled the nation’s debt load to close to 100 percent of GDP, compared with 36 percent before the real-estate market collapsed in 2007. The government plans to stabilize the debt ratio from 2015 or 2016.

Still, investors are returning to Spain’s stocks and bonds two years after it came close to losing access to financial markets. The Ibex-35 index of leading companies has gained about 9 percent this year while the yield on Spain’s 10-year benchmark bond was at 2.18 percent at 3:06 p.m. in Madrid today, compared with a euro-era high of 7.75 percent in 2012.

Stimulating Growth

“If the 2014 budget was for the recovery, the 2015 one will be the budget of the consolidation of the recovery and employment,” Deputy Prime Minister Soraya Saenz de Santamaria said at the press conference.

The government’s 2015 budget plan seeks to stimulate growth with an average 13 percent cut in income tax while the main corporate tax rate will drop to 28 percent next year, according to details released on June 20. Montoro said he’ll spend 1.1 billion euros on smaller companies and 470 million euros on putting young unemployed people back to work in order to boost growth.

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