Bloomberg News

Spain Scraps Election Pledge as Worsening Slump Hits Deficit

June 27, 2012

Spain’s government is studying tax increases to rein in the budget deficit, including scrapping a rebate for homeowners that Prime Minister Mariano Rajoy introduced six months ago to meet a campaign pledge.

The government needs to plug the deficit as data showed the central administration’s shortfall for the first five months approaching the full-year target and the Bank of Spain said the recession deepened in the second quarter. The government in Madrid may eliminate the tax rebate for mortgage holders and create environmental levies, Deputy Budget Minister Marta Fernandez Curras said yesterday.

Spain’s six-month old government enacted two election pledges at its second Cabinet meeting in December, raising pensions and restoring the rebate for homeowners scrapped by the previous administration. That policy is now in danger after the government already broke campaign promises by cutting firing costs and raising income tax as it battles the deficit amid a recession.

The yield on Spain’s benchmark 10-year bond rose for a third day, reaching 6.93 percent at 3:49 p.m. in Madrid, compared with 6.38 percent on June 22. The spread with similar German maturities widened to 541 basis points from 536 basis points yesterday.

Economic Contraction

Spain’s economy contracted 0.3 percent in the year’s first three months and the pace of contraction probably intensified in the second quarter, the Bank of Spain said today. It will publish its estimate for gross domestic product next month.

The central-government budget deficit widened in the first five months of the year to 3.4 percent of gross domestic product from 2.6 percent a year ago, approaching the year-end target of 3.5 percent. A quarter of the shortfall was due to transfers to cash-strapped regional governments that were brought forward this year, Curras said. Excluding the impact of those payments, the deficit narrowed to 2.4 percent from 2.6 percent.

“The deficit has started on a downward path and we expect that to intensify,” Curras said. “We are determined to meet the budget target.”

VAT Increase

Curras said she didn’t know when or by how much sales tax may rise. The government is considering increasing value-added tax following recommendations from the European Commission and the International Monetary Fund, a Budget Ministry official, who asked not to be named in line with policy, said yesterday. Budget Minister Cristobal Montoro has repeatedly criticized the previous government for raising VAT.

Antonio Beteta, Montoro’s deputy for public administration, didn’t rule out cutting civil servants’ wages today to narrow the deficit, as recommended by the IMF on June 15. Asked by reporters in Madrid if pay may be reduced, he said “the government needs to study and analyze and take the corresponding decisions, and it will make those that are necessary.” Beteta later denied in a statement having said that the government was considering cutting public wages.

Spain missed its deficit goal last year by almost 50 percent mainly because regional governments failed to cut spending enough and tax revenue slumped. In the first quarter of this year, regions balanced their budgets even as the economy contracted, helped by transfers from the government, Montoro said on June 1.

Welfare Spending

Regions spend most of their budgets on health and education and the 17 states’ health chiefs are due to meet Health Minister Ana Mato at 5 p.m. today in Madrid to discuss ways of saving money. The ruling People’s Party, which controls most of the regions, also pledged not to cut welfare spending during the campaign for the Nov. 20 parliamentary election.

The central government shortfall is set to be the largest component of the overall public-sector deficit, which is targeted at 5.3 percent of GDP this year. It was 8.9 percent in 2011, the third-largest in the euro area, according to the last estimate, which the government made after discovering bills left unpaid by regional administrations.

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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