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Spain unveils austerity measures

Source: Reuters - Sat 20th Aug 2011

Spain announced further austerity measures on Friday while also unveiling a halving of sales tax on house purchases as it seeks to strike a balance between cutting its deficit and stimulating anaemic economic growth.

The 5 billion euros 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 euros annually and a further 2.5 billion euros will be saved this year by front-loading tax payments from large businesses.

The tax measures, which will see large businesses pay higher tax rates until 2013, will help the government hit its target of a 3% GDP public deficit in that year. Companies will return to their normal tax payment schedule in 2014 and will pay lower taxes from that time.

"In no way will this lead to increases in tax, just changes in the timetabling of tax income," the Economy Ministry said in a statement. The opposition People's Party called the change to tax payments an accounting fudge.

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 euro zone 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 (for it) to be able to meet its deficit forecasts," said Marco Valli, euro zone economist at UniCredit.

However, he stressed he believed the government would take further measures if necessary to assure targets were met. 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.

Spain aims to cut its deficit to 6% of GDP this year. The government cut the gap to 9.2% in 2010 from 11.1% in 2009.

The government explained that measures to save on pharmacy costs would largely be made by cutting costs on brand name medicines by 15%, and making it obligatory for doctors to use generic drug names on prescriptions and not brand names.

risk premium for Spanish 10-year bonds compared with German bunds has come down since hitting euro-era highs of more than 400 basis points in August, thanks largely to bond purchases by the ECB.

On Friday 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 8% - aims to address a glut of around 1 million unsold houses and stimulate Spain's collapsed property market.

Spain's housing and construction sector drove a decade-long boom which petered out in 2008, leaving the country mired in its worst recession in half a century and with the highest unemployment rate in the EU.

Spain has come out of recession but economic growth barely hovers above zero.

Parliament has been recalled to vote next week on the measures, which are expected to win approval from lawmakers.

Prime Minister Jose 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.

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