Spain announced further austerity measures on Friday while also unveiling a halving of sales tax on house purchases as it seeks to strike a balance between cutting its deficit and stimulating anaemic economic growth. The 5 billion euros ($7 billion) of savings to reduce the deficit aim to fend off debt market attacks.
However, the government steered clear of drastic cuts that could damage the ruling Socialists' chances in November's general election. Moves to cut drug costs for regional governments with a new bill on generic medicines will save 2.4 billion euros annually and a further 2.5 billion euros will be saved this year by front-loading tax payments from large businesses.
The tax measures, which will see large businesses pay higher tax rates until 2013, will help the government hit its target of a 3 percent gross domestic product public deficit (GDP) in that year. Companies will return to their normal tax payment schedule in 2014 and will pay lower taxes from that time. "In no way will this lead to increases in tax, just changes in the timetabling of tax income," the Economy Ministry said in a statement.
The opposition People's Party called the change to tax payments an accounting fudge. The government said the measures would make it easier for Spain to hit its deficit targets this year as it battles to avoid being dragged into a euro zone debt crisis which has pushed borrowing costs to record levels. But analysts said the country's low growth prospects and market volatility could yet steer the government's deficit target off course.
"Given that we see growth forecasts being revised down across the euro zone and high uncertainty in financial markets, it is still not clear whether these measures will be enough (for it) to be able to meet its deficit forecasts," said Marco Valli, euro zone economist at UniCredit. However, he stressed he believed the government would take further measures if necessary to assure targets were met.
Though comparatively small, the austerity measures could compensate for any overshooting of public deficit targets by Spain's 17 autonomous regions, a persistent market worry. Spain aims to cut its deficit to 6 percent of gross domestic product this year. The government cut the gap to 9.2 percent in 2010 from 11.1 percent in 2009.
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