Spain looks to raising taxes to rein in deficit

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Spanish Prime Minister Jose Luis Rodriguez Zapatero has yet to indicate which taxes would be increased in 2010 but maintains he will not raise income tax.

Madrid – The Spanish government said Wednesday it would impose tax hikes equal to 1.5 percent of total output next year as it struggles with a deep recession and Europe's highest jobless rate.

Socialist Prime Minister Jose Luis Rodriguez Zapatero told parliament the "moderate rise" in taxes was needed "to guarantee sufficient capacity to meet the needs of providing social protection and investing in infrastructure".

The prime minister did not disclose which taxes would be increased in his budget for 2010, which will be tabled later in September, saying only that income earned from work would not be affected.

Spain has undergone one of the most dramatic reversals in Europe in its public accounts as the government boosts spending to face its worst recession in decades, which has lifted the unemployment rate to nearly 18 percent and caused revenues to plunge.

The government expects public deficit to swell to 9.5 percent of gross domestic product (GDP) this year, well above a European Union limit of 3.0 percent and after posting a surplus of 2.2 percent as recently as 2007.

The widening deficit prompted Standard and Poor’s to cut Spain’s top AAA credit rating in January.

Zapatero has launched a massive public works programme to provide jobs, which has torn up vast swatches of Spanish cities as workers extend or repair roads and pavements, and has introduced a new monthly subsidy for people whose unemployment benefits have run out.

But the prime minister said the government's budget for next year would include spending cuts in other areas in order to rein in the public deficit.

"Our 2010 budget will be the most austere in years. This will affect operating expenses, control of salary costs and a radical control of public sector hiring plans," he said.

The leader of the conservative opposition Popular Party, Mariano Rajoy, said the tax hikes -- which he estimated will total EUR 15 billion -- would be counterproductive.

"It will worsen the economic crisis and create more unemployment. There is no tax hike capable of covering the hole you have created," he charged.

Raising taxes would be a reversal in policy for Zapatero's Socialists, who have cut taxes and even abolished the wealth tax in 2008.

But he said taxes in Spain after the hikes come into effect will still be lower than the European average and when compared to the level they were at when he came to power in 2004.

Formerly one of the eurozone's chief engines of economic growth and job creation, Spain suffered an abrupt change of fortunes in 2008 when the global financial crisis hastened a correction that was already underway in its once-buoyant property sector.

Zapatero has vowed to bring the public deficit within the EU limit of 3.0 percent of GDP by 2012 but many economists are sceptical given Spain's high unemployment rate.

While the worst of the economic downturn has passed, the prime minister said the "most negative effects of this crisis, namely unemployment and the loss of firms, will last for a while after the economy has returned to growth".

"The size of the damage already done is such that it will take a considerable amount of time to digest its consequences, even under scenarios of a recovery that is better than expected," he added.

The government expects the Spanish economy, Europe's fifth-largest, will contract by 3.6 percent in 2009 and return to growth by the second half of 2010.

But it expects the unemployment rate will rise to 18.9 percent in 2010 after closing this year at 17.9 percent.

AFP / Expatica

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