Spain announced further austerity measures today (19 August) and halved sales tax on house purchases in a bid to strike a balance between cutting its deficit and stimulating anaemic economic growth.
The €5 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, and a further €2.5 billion will be saved by front-loading tax payments from large businesses each year through to 2013.
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 eurozone 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 to be able to meet its deficit forecasts,” said Marco Valli, a eurozone economist at UniCredit.
However, he stressed he believed the government would take further measures if necessary to assure targets were met.
Spain aims to cut its deficit to 6% of gross domestic product this year. The government cut the gap to 9.2% in 2010 from 11.1% in 2009.
Spain’s debt risk premium on 10-year bonds against German bunds has come down since hitting euro-era highs over 400 basis points in August, thanks largely to bond purchases by the European Central Bank (ECB).
Today the spread was around 288 bps, little changed from the previous day and tracking Italian debt, which the ECB has also been buying.
The temporary cut in sales tax to end-2011 on the purchase of new houses to 4% from eight is aimed at working through a glut of around one million unsold houses and stimulating Spain’s collapsed property market.
Spain’s housing and construction sector was the driving force behind a decade-long boom which petered out in 2008, leaving the country mired in its worst recession in half a century and the highest unemployment rate in the European Union.
Spain has come out of recession but economic growth barely hovers above zero.
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.
Parliament has been recalled to vote next week on the measures and expected to win approval from lawmakers.
Prime Minister José Luis Rodriguez Zapatero brought forward general elections by four months, hoping to take advantage of a pick-up in employment over the peak summer tourist season.