Deficit bigger than expected, Spain unveils tax hikes

Following the new conservative government's second Cabinet meeting, the budget deficit for this year was revised up to 8 percent of national income from the previous government's forecast of 6 percent.

Alongside the upward revision, which comes amid predictions that the Spanish economy will soon be back in recession, the government headed by Prime Minister Mariano Rajoy announced further measures to get a handle on its debts, including €8.9 billion in spending cuts. “This is the beginning of the beginning,” government spokeswoman Soraya Saenz de Santamaria said.
She said more reforms and austerity will come in 2012.
Landslide
The conservative Popular Party took power only last week after a landslide election win on November 20 and its main priority is to make sure that Spain does not get dragged into the debt crisis mire that has already forced Greece, Ireland and Portugal into seeking financial bailouts and is now threatening much-bigger Italy.

Though Spain's budget deficit is higher than the 3 percent threshold that was supposedly part of the euro's economic framework, it has so far avoided the same sort of bond market pressure that's currently afflicting Italy, partly because its overall central government debt burden is relatively low at around 66 percent - Italy's is around 120 percent.

The yield on Spain's benchmark ten-year bonds is closing out 2011 at just over 5 percent, lower than Italy's 7 percent, a rate that is widely-considered to be unsustainable in the long-run.

Nevertheless, Spain has to keep a lid on its borrowings especially with unemployment so high and its regions and the private sector is so indebted too following the collapse of a property and construction bubble that had fueled robust growth for nearly a decade. Spain crawled out of nearly two years of recession in 2010, but the economy slowed this summer and growth was outright flat in the third quarter of this year.

An increase in the deficit forecast was not a total surprise, but the scale of the increase was.
Economists
Many economists had predicted an increase because the economy stagnated in the third quarter and is now officially forecast to drop back into recession in the first quarter of 2012. Spain's jobless rate is 21.5 percent, the highest in the euro zone. Alongside the spending cuts, the new government maintained a freeze on civil servants' salaries and on practically all government hiring. Pensions though were increased by 1 percent, the only area of spending to go up.

Taxes on income will also be raised but only for two years.