Spain caps pension rise to meet deficit target

The government, breaking an electoral campaign pledge, said it would instead raise pensions by 1 to 2 percent in 2013 and tap reserve funds to ease liquidity tensions around pension payments.

Spain's fiscal situation left no choice over the decision as meeting a 2012 deficit target of 6.3 percent of output was the top priority for Spanish authorities, the centre-right government said. “It was a difficult, painful decision because it was the last thing we wanted to do, but we had no other choice,” Labour Minister Fatima Banez said.
The move was unexpected as Prime Minister Mariano Rajoy had said earlier this year that he would protect pensions, the only remaining campaign promise he had not been forced to break as Spain was dragged into the centre of the euro zone debt crisis.

When Reuters revealed the government was mulling not applying the inflation-linked review this year, Rajoy at first ruled it out, then said since September that it would be the last thing he would do to balance public finances.

Under Spanish law, pensions should be reviewed each year in line with the inflation data of November, which came out at 2.9 percent on Friday. By not applying the rule, the government will save around 3.8 billion euros and keep its EU-agreed deficit target within reach. “This responsible decision will enable (Spain) to meet its deficit target, an indispensable objective to make sure Spain can access funding, exit the crisis and come back to growth,” the government said in a statement.

As announced in September, all state pensions will rise by 1 percent as of January 2013, while pensioners who receive less than 1'000 euros a month will get an extra 1 percent increase. This will add just 1.5 billion euros to the 2013 budget.