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UPDATE 1-Spain's PP rejects tax hikes to deflate deficit

Mon, 12th Dec 2011 13:26

By Paul Day

MADRID, Dec 12 (Reuters) - Spain will not use tax hikes
to resolve a budget crunch, its new government said on Monday, with incoming Prime Minister Mariano Rajoy pointing to further austerity to deflate the public deficit and reduce debt.

The economic spokesman for the centre-right People's Party (PP), which won a resounding election victory last month, said increasing taxes would not be appropriate while the economy is struggling to grow and create new jobs.

'We mustn't raise taxes for the simple reason that the economy is at a standstill and at risk of entering recession and so raising taxes would mean less growth, more economic problems and more unemployment,' Cristobal Montoro said in an interview with COPE radio.

Spain, still reeling from a burst property bubble and a consequent slump in domestic demand, is widely expected to slip back into recession early next year. The country's unemployment rate is already more than double the European Union average.

Prime Minister-elect Mariano Rajoy said he expected Spanish growth to be below 1 percent this year and in 2012, and would give official forecasts as soon as possible.

'I call on everyone in the party to be austere, as much in the handling of state funds as in their personal behaviour,' Rajoy, who takes the helm next Wednesday, told a party conference in Madrid on Monday.

The new government has pledged to cut the deficit to 4.4 percent of gross domestic product in 2012 from around 6.5 percent expected this year, implying the need for savings of around 20 billion euros ($26.73 billion).

But the party has given few clues to how it plans to make the necessary cuts while at the same time encouraging economic growth and job creation.

Rajoy has said he will cut taxes for small and medium sized companies, known as SMEs, but with banks rationing new loans in an effort to recapitalise balance sheets and consumer demand scant, a lower tax burden will do little to increase investment, said Michael Taylor, an economist with Lombard Street in London.

'Generally, overall deficit reduction requires tax increases. In this environment, it's difficult to stimulate demand this way ... You can do what you like for the SMEs but any extra will be used to keep them afloat,' Taylor said.


The outgoing Socialist government, trounced by the PP in November's election amid dissatisfaction over its handling of the economic crisis, increased value-added tax in July 2010 to 18 percent from 16 percent.

Some economists say Rajoy has room to raise VAT again as Spain still has one of the lowest rates in the euro zone. Germany, France and Britain all have VAT rates of between 19 percent and 20 percent.

But PP officials have repeatedly ruled out such a move, saying it would hit consumer spending.

The conservatives pledged on the campaign trail they would not touch Spain's treasured welfare state, but regional governments, which are responsible for education and health spending, are having to tighten their belts dramatically.

International debt markets are watching the PP's first moves carefully to see if they are able to get the deficit under control without hitting the already battered economy.

Rajoy repeated on Monday that his main priority will be growth and job creation, and put reform of the labour market at the top of the new government's list of things to do.

However, Montoro recognised it will be difficult to create jobs in 2012 given the stagnant economy.

More than one Spaniard in five is out of work and almost half of people under 25 and available for work are unemployed.

'What we have to do is reform the banking sector, the public sector and the labour market, and introduce greater competition in communications, energy and transportation, and open the way to economic growth starting after 2012, creating jobs. But to do so we'll have to overcome a very negative economic legacy,' Montoro said. ($1 = 0.7482 euros)

(Editing by Catherine Evans) Keywords: SPAIN TAXES/

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