Spain says deficit down sharply through July thanks to austerity, tax hikes

By Daniel Woolls, AP
Wednesday, September 1, 2010

Spain halves deficit with painful austerity cuts

MADRID — Spain’s deficit is down sharply thanks to an unpopular cocktail of tax hikes and austerity cuts — good news for a government fighting to ward off fears it might need a bailout like the one that saved Greece from bankruptcy.

Still, with a fifth of the work force out of a job and businesses struggling to survive, the spending cuts that are helping the budget are likely to keep any economic recovery subdued.

The Finance Ministry said in a report Tuesday that through the end of July, the central government’s deficit totaled 2.4 percent of gross domestic product, half of what it was for the same period of 2009.

The figures do not include spending by regional governments, however, which will be key to helping the government meet its stated goal of cutting the deficit from 11.2 percent of GDP last year to 3 percent in 2013.

The report says revenue rose 10.4 percent through July, largely due to a higher VAT rate, a tax on goods and services.

The stock market’s IBEX 35 index closed 3.51 percent up at the close of trading Wednesday.

But this is a one-time boost widely attributed to Spaniards rushing to buy big-ticket items like refrigerators and washing machines before those tax rates rose on July 1.

On the spending side, the government saved money by eliminating a €400 ($500) tax rebate it granted to most taxpayers in 2008 and cutting civil servants’ wages by 5 percent as part of an austerity plan approved in May.

But other numbers show the uphill battle Socialist Prime Minister Jose Luis Rodriguez Zapatero still faces as he tries to resurrect an economy that collapsed two years ago after a real estate bubble burst and is now saddled with a 20 percent jobless rate: tax revenue from businesses is down 9.8 percent in the first seven months of the year.

Consumers, meanwhile, remain cautious — car sales dropped 24 percent in August compared from a year earlier to reach their lowest level since 1989, two associations of manufacturers and dealers reported Wednesday. The government had been providing cash aid to boost sales as part of a stimulus package but that money ran out in July.

Indeed, Zapatero has a difficult autumn ahead of him. Unions plan a general strike Sept. 29 to protest labor market reforms that seek to make companies less wary of hiring by lowering the cost of firing people. The unions are also angry over government plans to extend the retirement age from 65 to 67 and change the way pension schemes are calculated, with the result that most people will get a bit less in their golden years.

Zapatero runs a minority government with very few allies remaining in Parliament and dwindling support among Spaniards.

A poll released Wednesday by Cadena Ser radio said that if elections were held now, the conservative Popular Party would win by eight percentage points. The margin of error was three points. Less than 28 percent of those polled said they approve of the prime minister’s performance.

As Spaniards return from summer vacation, Zapatero’s first task is to pass a lean budget for next year. Officials say average government ministry spending will be cut to 2006 levels.

Zapatero now has his very top people wooing a Basque nationalist party whose support would give him enough support to pass a budget, but at a price. In return, the already largely autonomous Basques want more self-rule in economic issues.

El Pais reported that some lawmakers think that if Zapatero fails to pass a budget, something which has never happened in post-Franco Spain, he could face early elections. As it stands, Zapatero’s second term runs through March 2012.

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