Spain: 2011 deficit could be higher than 8%

Luis de Guindos said in a radio interview that the government, which took power just before Christmas, found out only early last week how bad the numbers were and had no choice but to act quickly by increasing income and property taxes, despite an election campaign pledge not to raise taxes.

The conservative Popular Party swept to victory in November 20 general elections, winning a comfortable majority in Parliament as voters enduring 21.5 unemployment and a stagnant economy dumped the incumbent Socialists.

De Guindos said the 8 per cent figure — up from a 6 per cent forecast by the outgoing government — would have come out in a matter of weeks anyway and would have almost certainly led to a punishing rise in Spain's borrowing costs.

So the government acted quickly by announcing Friday a package of tax rises and spending cuts — totaling about euro15 billion ($19 billion) — at the same time as it unveiled the new deficit estimate, so as to stay ahead of events, he said.

"It was an act of responsibility and political initiative to keep the Spanish economy from reaching a situation that would have been practically unsustainable," de Guindos told Cadena Ser radio.

He said both the central government and Spain's regional governments shared blame for the overspending.

As for the final 2011 deficit figure, he said: "It is possible that it will exceed 8 per cent. Not by much, I certainly hope."

He said Spain right now, with its economy a mess and the eurozone in a debt crisis, could not afford to announce its deficit will be two points higher than forecast without also quickly taking measures like raising taxes, as unpleasant as that might be.

"If we had not, others would have done it for us," de Guindos said, suggesting the European Union would have stepped in somehow.

The deficit-reduction package is a first bitter taste of austerity for Spaniards under the new Popular Party government. It came as part of an extension of the 2011 budget because none for 2012 had been passed when the government changed hands.

More austerity is expected when a full-blown 2012 budget is approved in late March.

The government's goal is to get the deficit down to 4.4 per cent of GDP this year.