Spain hikes tobacco tax

MADRID
SPAIN brought forward pension reforms, raised tobacco taxes and cut windpower subsidies yesterday, as it fought to slash its high budget deficit and calm investor concerns that it could need a financial bailout.

The new cost-cutting and revenue raising measures come just over a week after Spain's prime minister insisted it would not need a new round of cuts, and said those betting the country would end up going the same way as Dublin or Athens would lose.

Pension reform is highly contentious in Spain and by bringing changes forward from late March to January, Socialist Prime Minister Jose Luis Rodriguez Zapatero risks the ire of powerful public sector unions.

The government has been left with little choice by the pressure being exerted on it by bond markets and an economy that latest data yesterday showed is still struggling to get going after one of Europe's longest recessions. “With these reforms we think we will contribute to the economic drive, the reform drive and consolidation of our public accounts,” Economy Minister Elena Salgado told reporters after the weekly cabinet meeting.

She said the tobacco tax hike of as much as 25 cents per packet would raise 780 million euros a year, less than some had anticipated. “It's the right time to increase tobacco taxes. It's the right thing for public health. Making our tobacco more expensive will reduce consumption and will help finance the income deficit.” There had been speculation that the government would also raise taxes on alcohol and fuel, but Salgado said the government was not looking at any more tax increases.

The cabinet also approved a 35 percent cut in windpower subsidies between now and 2012 and said savings from renewable energy subsidies would total 1.1 billion euros to 2013. It rubber-stamped other debt-reduction measures announced by Zapatero this week involving the sell-off of parts of its state lottery and airport businesses.

Spain's relative cost of borrowing has pulled back from record highs on the back of reports of buying of its bonds by the European Central Bank. The yield on its 10-year bonds was little changed at 5.2 percent yesterday while Madrid's stock exchange was steady. “The fundamentals of our economy haven't changed,” Salgado said. “We have to treat these turbulences as such. The markets have calmed a lot in the last 48 hours but the fundamentals haven't changed, which means (that) isn't the worry.” Spain's public deficit stood at 11.1 percent of gross domestic product in 2009 and analysts have long warned extra measures would be needed beyond an austere 2011 budget and promised labour market reform to bring it down.

Salgado renewed Madrid's calls for systemic reform to deal with the debt crisis, whose spread to Spain would likely exhaust the rescue funds set aside by the euro zone to deal with it. She said the common currency could not exist without common economic policies - an idea that was quickly knocked back by Germany.

Spain's savings banks are seen as one of its weak links and investors have worried that high levels of debt from a property boom and bust could force the government to commit more money than it already has to bail them out.