By Humphrey Carter PALMA

FIRST IVA (VAT) went up and now electricity rates are going to rise sharply in the New Year as the Spanish government continues to raise much needed extra funds to cover its huge deficit.

But, the Spanish government's move to raise household electricity prices by 9.8% from January 1 could stoke inflationary pressures as the higher prices pass through households and into the larger economy.

The increase will affect around 17 million Spanish households that rely on the so-called “price of last resort,“ the only one still set by the government after the sector was liberalised in recent years, Spain's industry ministry said late Monday. This price is available only to households using less than 10 kilowatt hours that decline to negotiate directly with power companies. The increase adds to inflationary pressures facing consumers. Spain's consumer-price index rose 2.3% in November from a year earlier, a pace that is among the fastest in the euro zone and above the European Central Bank's 2% ceiling for the region.

The ministry said the increase is justified by higher prices for fossil fuels, since natural gas—often shipped in liquefied form—is the main source of electricity in the country. It added that the increase in electricity prices is in-line with hikes seen in recent months in other European countries.

Observers say the government is also trying to reduce the country's tariff deficit - the difference between prices charged by utilities and those paid by consumers. The tariff deficit, which is booked as revenue by the utilities, has effectively served as a government subsidy on power prices by enabling utilities to provide power to consumers at a price lower than the cost of production.

The deficit has been rising over the past decade as successive governments failed to increase power prices fast enough to keep pace with rising oil and gas prices, and now stands at over 15 billion euros. The deficit has also widened because of a surge in expensive renewable energy production - in particular wind and solar power - that has gone from almost zero to over 16% of Spain's power generation in 10 years.

Even after the recent cuts the government made to renewable energy subsidies, wind-power generation remains twice as costly as average-electricity generation, and solar power is close to nine times as expensive. The subsidy cuts are part of a government plan to lower the budget deficit to 9.3% of gross domestic product this year.