Spain says deficit bigger than expected, hikes taxes

Fri Dec 30, 2011 11:47am EST

(Reuters) - Spain's new government said on Friday that this year's budget deficit would be much larger than expected and announced a slew of surprise tax hikes and wage freezes that could drag the country back to the centre of the euro zone debt crisis.
In its first decrees since sweeping to victory in November, the centre-right government said the public deficit for 2011 would come in at 8 percent of gross domestic product, well above an official target of 6 percent.
It announced initial public spending cuts of 8.9 billion euros ($11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year to tackle the shortfall.
"This is just the beginning ... We're facing an extraordinary and unexpected situation, forcing us to take extraordinary and unexpected measures," Deputy Prime Minister Soraya Saenz de Santamaria said.
Spain has been under market scrutiny over its ability to control its public finances, and Madrid has seen risk premiums soar to record highs on contagion fears as the euro zone debt crisis spread.
Ten days ago the Treasury said the central government budget deficit was on course to meet a full-year target of 4.8 percent of GDP, which analysts said would push Spain's overall public deficit above its 6 percent target for the year.
But the scale of the overshoot took some economists by surprise and led them to forecast a deeper recession, ending the year on a downbeat note for the euro zone as a whole.
"This is a strong shock. I didn't expect this kind of deficit increase. How can we achieve the objective using personal income taxes and capital taxes? This means making the recession much worse," economist at Barcelona ESADE university Robert Tornabell.
While Italy's debt mountain has been the biggest concern in financial markets in recent months, Spain had been seen as faring somewhat better. Measures taken by the previous Socialist government, while costing it the election, have kept the markets from pushing Spanish yields to unsustainable levels.
But as recession looms across the euro zone, the new government faces a rocky few years. After Friday's initial round of tax hikes and spending cuts, it plans to unveil a final 2012 budget by the end of March.
The Socialists cut the budget shortfall from 11.2 percent of gross domestic product in 2009, and the conservatives must take up the baton and bring the deficit down to 4.4 percent in 2012 and 3 percent in 2013.
If the final 2011 deficit hits the 8 percent mark, as the conservatives say, the government will need to make total savings worth more than 35 billion euros in 2012 to meet the official target.
TAX THE RICH
Spain's economy, the fourth-largest in the euro zone, is likely to have shrunk as much as 0.3 percent in the fourth quarter, Economy Minister Luis de Guindos said this week, and many economists expect output to keep shrinking in early 2012.


(Additional reporting, writing by Paul Day; Editing by Hugh Lawson)