Rise in IVA helps Spain narrow budget gap

Spain almost halved its central government budget deficit in the first seven months of 2010 compared to a year earlier, helped by a surge in value-added tax revenues and suggesting an austerity drive is working.

Data from the Economy Ministry showed the shortfall, which does not include the balances of the social security system or provincial governments, fell to 25.77 billion euros ($32.57 billion), 48.2 percent down from the same period last year.

The figure is equivalent to 2.44 percent of gross domestic product, down from 4.73 percent in the same period of 2009.

A release accompanying the data said the budget had been helped by a jump of 42.2 percent in the VAT take following tax consolidation measures taken earlier this year and an improving economy.

economy escaped an 18-month long recession in the first quarter and the government expects it to grow in each quarter this year, though economists say it may struggle to meet its targets.

The country is one of a handful of euro zone economies being watched closely by financial markets for signs that a sluggish recovery and rising debt will drive them into a similar crisis to that which hit Greece earlier this year.

In May the government passed a 15 billion euro austerity package effective this year and next, which included civil servant wage cuts and pension freezes and the scrapping of some welfare payments. It also raised VAT from July 1 by two percentage points to 18 percent.

The government's tax take rose by 14 percent in the first seven months of the year due to consolidation measures taken this year as well as a stabilisation in the economy, the release said. Direct taxes received rose by 3.3 percent from the same period last year.