Palma/Madrid.—The government, which is struggling to cut one of the eurozone's largest public deficits during a double-dip recession, has raised taxes on tobacco and alcohol, except wine and beer.

The tax hikes will generate increased revenues of around 700 million euros this year, Budget Minister Cristobal Montoro told a news conference following a weekly cabinet meeting which approved the tax hikes. “In the case of alcoholic drinks, the tax increase will be of 10 percent but wine and beer will not be touched,” he added without specifying by how much taxes on tobacco would rise.

The European Union, which in June 2012 granted Spain a rescue loan of up to 100 billion euros to prop up banks that have been swamped in bad loans since a decade-long property bubble imploded in 2008, has pressured Spain to increase its sales tax to boost revenues but Madrid has refused.

Prime Minister Mariano Rajoy's centre right government raised the sales tax from 18 percent to 21 percent last year but many essential items like bread and milk enjoy a reduced rate.

The government also created a new tax on fluorinated gases which are used in refrigeration and air conditioning and eliminated some corporate tax deductions for losses in foreign operations or investment portfolios, Montoro said.

The measures will have a combined effect of boosting revenues by around one billion euros this year, the minister said. This is on top of a three-year effort to save 150 billion euros by the end of 2014 which the government launched at the beginning of 2012.

The Spanish economy, the eurozone's fourth largest, is entrenched in a double-dip recession that sent the unemployment rate soaring to a record 27.16 percent in the first quarter. The economic downturn has squeezed tax revenues and caused welfare costs to soar as the jobless queue lengthens, causing Spain to struggle to meet EuropeaUnion targets to curb the public deficit.

The European Commission, the executive arm of the European Union, in May gave Spain two additional years to bring its public deficit to below a limit of 3.0 percent of gross domestic products.

Spain now expects to meet the 3.0 percent deficit limit only in 2016. It predicts the deficit will come in at 6.3 percent this year, 5.5 percent in 2014, 4.1 percent in 2015 and 2.7 percent in 2016.


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