August 8, 2011 / 3:35 PM / 6 years ago

Opposition, analysts skeptical on fresh Spain cuts

MADRID (Reuters) - Economists and Spain's main opposition party cast doubt on Monday on government pledges to come up with new measures to reduce the budget deficit this month as the country heads for November elections.

Under pressure to take more steps to cut a deficit that has put Spain at the heart of Europe's debt crisis, Economy Minister Elena Salgado on Sunday said the government would use an August 19 cabinet meeting to outline further savings.

Salgado did not give details except to say that 2.5 billion euros of savings could be made through changes to the methodology for large companies' tax payments.

That change -- together with a plan to save an estimated 2.4 billion euros in drugs costs for regional governments through a new bill on generic medicines -- add up to a deficit reduction of half a percent of GDP.

The Popular Party -- the center-right opposition party -- called the tax announcement an accounting trick. It said the 2.5 billion euros would come from forcing large companies to pay taxes due in 2012 before the end of 2011.

"This isn't tax reforms, this is adjusting the tax calendar ... bringing more revenue in to 2011 at the cost of less revenue in 2012," shadow economy minister Cristobal Montoro said on Monday.

One good piece of news for the budget was a roughly 80 basis point drop in Spain's cost of borrowing on financial markets after the ECB began buying Spanish and Italian bonds on Monday.

The government has already slashed the sizeable public deficit -- the most urgent concern for investors -- from 11.1 percent of gross domestic product in 2009 to 9.2 percent in 2010 and a target of 6 percent this year.

But analysts say this year's target looks increasingly optimistic given poor domestic growth, the overall jump in debt-servicing costs and increasing concerns over broader global growth.

Prime Minister Jose Luis Rodriguez Zapatero last month brought forward general elections to November 20 from spring 2012, saying it would lessen uncertainty for the electorate and nervous markets.

After months of anti-austerity protests following public wage cuts, frozen welfare payments and an increase of the national retirement age, taking further painful steps would be political suicide for the Socialists.

"The current government is at a stage where additional bold measures are unlikely and 'external help' (ECB buying bonds, EU accelerating the proper set up of the EFSF mechanism) is needed to control the situation, especially in light of the general elections having been brought forward to November," Credit Suisse said in a research note on Monday.

GOVERNMENT OPTIMISM

Economic sluggishness in the second half, despite an expected spike in summer-time, tourist-driven employment, struggling regions and unfavorable year-on-year comparisons will hamper the government's efforts on the deficit.

"They need to reinforce the budget deficit consolidation drive in the second half of the year," said Raj Badiani, economist at Global Insight. "First, growth is slowing in the third quarter of 2011, and is expected to remain dormant in the fourth quarter. Second, the one-off spike in indirect taxes from the hike in the VAT rate in July 1, 2010 will disappear in the second half."

The solution, then, is to announce savings plans that the majority of voters won't have to pay for and won't mean more spending cuts to an austerity-weary public, while at the same time changing tax regimes to make sure they meet the 2011 budget deficit target.

The Socialists are pushing ahead with the sale of its national lottery and airport operator, which will help reduce national debt though not the deficit. But they insist they have no plans to raise taxes.

With concern also rising that Spain's cash strapped regions will miss their own deficit targets this year, bringing forward next year's tax collection would serve to add funds to strangled coffers this year without upsetting the electorate.

Additional reporting by Carlos Ruano. Writing by Paul Day; editing by Patrick Graham

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