Spain minister urges change in deficit target

Spain's public deficit target for this year should be changed because it is based on outdated growth forecasts, Finance Minister Cristobal Montoro said in an interview published on Sunday. Spain's new conservative government has raised taxes and slashed spending since coming to power last month to try to meet a 2012 target agreed with the EU of cutting the deficit to 4.4 percent of gross domestic product. It says the deficit hit around 8.0 percent of output last year, down from 9.3 percent in 2010 but way above the official 6.0-percent target agreed with Brussels by Spain's previous socialist government. "It is obvious that when the target was set to reduce the deficit from 6.0 percent to 4.4 percent, it was based on a scenario of economic growth and not of recession as we find ourselves in now," Montoro told daily La Vanguardia. "When Brussels said that Spain should reduce the deficit to 4.4 percent it was because it predicted growth of 2.3 percent. "That scenario would suppose a rise in tax revenues, but with a recession tax revenues will once again fall." Spain's new government expects the country will go into recession this quarter. Last week the International Monetary Fund (IMF) said it expected the Spanish economy, the eurozone's fourth largest, would shrink by 1.7 percent this year after rising by an estimated 0.7 percent last year. "The scenario has changed as the IMF has said, and the government is waiting for Brussels to also change its scenario and adapt it to the new situation," Montoro said. The government, which came to power after November 20 elections, has announced spending cuts of 8.9 billion euros ($11.5 billion), including a public sector wage freeze, and tax increases on income, savings and property to bring in 6.3 billion euros. It has vowed to implement further measures to rein in the deficit leading many economists to believe that the government will raise Spain's sales tax rate which at 18 percent is low by European standards. But Montoro ruled out a sales tax hike, saying it would hurt the lower classes and add to a reduction in consumer spending. "By how much has consumption fallen? Why would we raise the sales tax, so that it keeps falling?" the minister said. Spain only emerged at the start of 2010 from an 18-month recession, triggered by the global financial crisis and a property bubble collapse, which destroyed millions of jobs and left banks with mountains of bad loans. The collapse forced a major restructuring of the financial sector and tough spending cuts which the new government has vowed to deepen in order to create jobs and reassure the financial markets that lend to Spain.