Tuesday, 3 January 2012

Cutbacks and more cutbacks - what's new?

Cristóbal Montoro, Finance Minister
(Photo: cadenaser.com)

SPAIN (El País/Miguel Jiménez) Finance Minister Cristóbal Montoro on Monday said the Cabinet will unveil further measures to rein in the budget deficit. The incoming conservative Popular Party government on Friday announced tax hikes and spending cuts worth some 14.9 billion euros after revealing the budget deficit for last year would overshoot the previous administration's target of six percent of GDP by a full two percentage points. Montoro did not say if the new measures, to be announced on Thursday, would include further belt-tightening measures or initiatives to boost growth. The minister said the new batch of measures will show Spain's European partners that the country has a government "capable of taking decisions.">>>

In an interview with Spanish radio station Cadena SER, Economy Minister Luis de Guindos said the final figure for last year's shortfall could even come in above eight percent. "It is possible," he said. "I hope it won't be by much."

During its campaign for the November 20 general elections, the PP had pledged not to hike taxes. De Guindos said the government, which took office in the third week of December, had only detected the blowout in the country's finances days before announcing last Friday's measures, which he justified as "an exercise in responsibility."

The economy minister argued the austerity drive was needed to ensure Spain meets the target agreed with the European Commission for reducing its budget deficit this year to 4.4 percent. If the government had not taken the measures, they would have been "imposed" on us, he said.

"The government cannot allow itself to announce that the public deficit will fall two percentage points short of the six-percent target without introducing tax hikes, despite the fact that Prime Minister Mariano Rajoy rejected this during the campaign," De Guindos said.

A failure to act would have created a "very difficult situation for the domestic economy," De Guindos said. Spain's risk premium was steady on Monday.

The minister said the government is not ruling out having to raise the standard value-added tax (VAT) rate, which currently stands at 18 percent, in the state budget for this year, which is expected to be released around March.

While in opposition, Rajoy heavily criticized the outgoing Socialist government's decision to raise the standard VAT rate from 16 percent as a measure that would dampen demand and depress activity.

"We have to talk with our European partners as we have to be aware that if we only turn the screws in terms of spending cuts, we're going to get ourselves into a mess."

The minister said the new government has an "aggressive reform agenda," to boost growth. The first pillar of this agenda will be an overhaul of the labor market. The government expects to receive proposals in this area next week from the country's labor unions and employer groups.

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