Financial Times : December 3 2010
Spain has raised tobacco tax, reduced windpower subsidies and brought forward pension reform in the latest measures to reduce the budget deficit and convince financial markets it has embarked on fundamental economic improvements.
Prices of sovereign bonds issued by Spain, Portugal and other “peripheral” eurozone economies fell sharply early in the week amid fears of debt defaults following the rescues of Ireland and Greece. But they recovered after the European Central Bank made large-scale bond purchases on Thursday.
Spain has sought to restore confidence in its solvency with a steady stream of announcements regarded as positive by investors, and has said it is on track to cut the budget deficit from 11.1 per cent of gross domestic product in 2009 to 9.3 per cent this year and 6 per cent in 2011.
Luis Garicano, professor of economics and strategy at the London School of Economics, described the pension announcement as a “big deal” and “very good news” but said it was essential to implement other structural reforms to enhance competitiveness and growth.
“With Spain’s large volume of private sector debt, you need some clear perspective that we are going to grow to get out of the hole,” said Mr Garicano. “You need a sustained calendar of very consistent reforms to get out of these recurrent crises.”
Elena Salgado, finance minister, said after the weekly cabinet meeting on Friday that the increased tobacco tax would raise an extra €780m ($1bn) a year assuming constant consumption. A separate government announcement confirming a 35 per cent cut in windpower subsidies said a new alternative energy plan would save €1.1bn up to 2013.
Alfredo Pérez Rubalcaba, the deputy prime minister, also said a plan to reform pensions by increasing the retirement age gradually from 65 to 67 would be proposed by the government on January 28. The Socialist government had previously alarmed investors by putting the reform on the backburner.
José Luis Rodríguez Zapatero, prime minister, cancelled a visit to Argentina for an Ibero-American summit to oversee the latest round of economic measures, which include the partial privatisation of the state lottery company and of the airports authority, and the abolition of a €426 monthly payment for the long-term unemployed.
His government is also cutting corporation tax for small businesses and making it quicker and cheaper to set up companies.
Ms Salgado said Spain was engaged in “accelerated fiscal consolidation that is bearing fruit and a period of deep reforms”.
Such measures are welcomed by most Spanish business leaders and by foreign investors, but economists remain concerned by unemployment that remains above 20 per cent of the workforce and a sluggish economy at risk of falling back into recession.
Spain’s industrial production fell 1.9 per cent in October from a year earlier, after a smaller fall in September and a rise in August, according to figures released on Friday by the National Statistics Institute.
Raj Badiani, economist at IHS Global Insight, described this “an exceedingly poor outcome” given that industrial output had fallen 9.1 per cent in October 2009.
He said the data release “supports other key indications which signal that the economy is failing to generate any recovery momentum after stalling in the third quarter”