REFILE-UPDATE 2-Spain's Rajoy, intent on job creation, ups growth view

Tue Feb 25, 2014 11:21am EST

Related Topics

* Premier forecasts economic growth at 1.0 pct in 2014, 1.5 pct in 2015

* Expects net job creation this year

* Cuts employers' social security payments for new jobs created

* EU forecasts Spanish growth at 1 pct in 2014, 1.7 pct in 2015

By Blanca Rodríguez

MADRID, Feb 25 (Reuters) - Spain's economy will expand a faster-than-expected 1.0 percent in 2014, leading to moderate job creation for the first time in six years, Prime Minister Mariano Rajoy said on Tuesday.

Rajoy told parliament in his annual state-of-the-nation address that his main priority was to reduce one of Europe's highest jobless rates, and he announced an immediate cut in the first two years of social security contributions for companies' new hires.

While Rajoy, who is half way through a four-year term, has overseen a stabilization of Spain's economy, he recognized that - with one in four out of work - few Spaniards have reaped the benefits so far.

Polls show most voters believe the economic turnaround is due to external factors and if elections were held now, Rajoy's centre-right People's Party (PP) would lose its absolute majority in parliament and might lose power altogether.

"We can't feel satisfied until the jobless rate comes down from the dramatic level that still demands our attention," Rajoy said.

"I repeat, we'll see net employment creation. The growth will still be moderate this year ...but it will intensify in 2015."

Spain's jobless rate of around 26 percent is not expected to fall significantly this year.

Rajoy promised income tax relief for lower wage earners as well as a pick-up in growth to 1.5 percent next year - three years after he broke a campaign pledge and raised income tax to cut one of Europe's highest public deficits.

The European Commission on Tuesday also forecast Spain's economy would grow 1 percent this year and was more optimistic for 2015, projecting an expansion of 1.7 percent.

The Spanish government's growth forecast in the 2014 budget had been for 0.7 percent, but surging exports have lifted that outlook.

Two years after teetering on the brink of default, and after six years of economic doldrums, Spain's sovereign borrowing costs have fallen to near-record lows.

Its short-term costs dropped on Tuesday at an auction of 3-month and 9-month paper, days after Moody's credit rating agency bumped up its ratings on Spanish debt, citing reforms that have helped make the economy more competitive.

Exports have jumped as companies have responded to more flexible rules on hiring and firing, introduced by Rajoy two years ago.

That has helped the economy to recover from the 2008 collapse of a long building and housing bubble that brought Spain's banks to their knees in a crisis that threatened to bring down the euro.

EYE ON THE DEFICIT

"Spain was seen as dragging Europe down and now it is seen as a driver," Rajoy said in a 90-minute speech. An opposition leader said he was getting ahead of himself.

"What country are you living in?" retorted Socialist leader Alfredo Perez Rubalcaba at the beginning of an afternoon debate on the speech, highlighting Spain's record-high debt, increasing wage inequality and reduced purchasing power.

While Spain's public deficit has come down from a double-digit peak in 2011, debt is seen rising to close to 100 percent of national output by the end of this year, the highest level in more than a century. Public debt has almost tripled since 2008.

Rajoy is banking on economic recovery to allow him to reduce some taxes next year, after he hiked VAT and income tax. But he still needs to keep an eye on the budget gap.

In its forecast on Tuesday, Brussels saw Spain hitting its deficit reduction target this year, bringing the gap down to an amount equivalent to 5.8 percent of economic output.

But it said that if the government sticks to a plan to let temporary income tax hikes phase out at the end of this year, the deficit could soar next year to 6.5 percent of GDP, well over the 4.2 percent target.

Rajoy plans a complete overhaul of the tax system by next year, which could change forecasts. He said on Tuesday he would send his tax bill to parliament by June.

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