Spain to fight tax evasion, cut public firms

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Spain's right-leaning government said Thursday it will step up the fight against tax fraud and cut the number of debt-laden state-owned firms as it seeks to slash the deficit.

Just two weeks after taking power, Prime Minister Mariano Rajoy's team announced a second round of reforms to meet an increasingly daunting deficit-cutting target.

The government said it aimed to recoup 8.17 billion euros ($10.5 billion) this year by boosting the number of tax inspectors and limiting the size of cash payments.

The underground economy is estimated to account for nearly one-fourth of Spain's gross domestic product and several plans put in place in recent years to fight tax evasion have had little impact.

The government must also "resize the public sector," Deputy Prime Minister Soraya Saenz de Santamaria said, adding that there were more than 4,000 public companies and foundations, mostly run by regional governments.

"The main objective is to bring the public deficit under control," she told a news conference after a cabinet meeting.

Last week, the government announced budget cuts amounting to 8.9 billion euros and tax increases, including on salaries and on capital income, to bring in another 6.28 billion euros.

Santamaria warned at the time that those measures were just "the beginning of the beginning."

Rajoy's government is taking quick action so as to meet a promise to slash the annual public deficit to 4.4 percent of gross domestic product in 2012, come what may.

The government has acknowledged Spain will miss its goal of reducing the public deficit to 6.0 percent of GDP in 2011 from 9.3 percent the year before. The 2011 deficit may even top 8.0 percent, ministers say.

The Popular Party government says the deficit slippage in 2011 could force it to implement another 20 billion euros in austerity measures for 2012, on top of the originally estimated savings target of 16.5 billion euros.

The government also announced that the social security fund's accounts are worse than had been feared, with a 2011 deficit of 668 million euros. The previous Socialist government had forecast a social security surplus.

Economy Minister Luis de Guindos earlier spooked financial markets in an interview with the Financial Times in which he warned of large provisions for banks' bad loans.

"If you take international valuations as in the case of Ireland, at the most you are talking about the need for 50 billion euros of extra provisions (for Spanish banks)," De Guindos said.

"In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years."

Spanish share prices plunged 3.04 percent in afternoon trade after the warning, dragged down by banks.

The banks loaned huge amounts of money during the property bubble, which imploded in 2008 leaving them holding piles of doubtful loans and devalued real estate assets.

The property crash also destroyed millions of jobs and sent the economy into a slump from which it has yet to recover. The unemployment rate in the third quarter of 2011 hit 21.5 percent.

The European Banking Authority said in December that Spain's five biggest banks required an extra 26 billion euros in fresh capital.

De Guindos also told the newspaper he would impose strict budget discipline on the 17 powerful autonomous regions, which are responsible for health and education services.

A new law in March would introduce tough budget controls, he said.

"You will have a priori controls. Before approving the budget, ministers will need the green light from the central government," De Guindos said.

In a first reaction, Catalonia's regional government spokesman Francesc Homs said the plan was "unacceptable" and "intolerable."

Moody's Investors Service warned last month that the regions will miss deficit-cutting targets for 2011 and could imperil Spanish efforts to curb the national deficit in 2012.

© 2012 AFP

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