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Spain's PP rejects tax hikes to deflate deficit

Source: Reuters - Mon 12th Dec 2011

Spain should not rely on tax hikes to deflate the public deficit and reduce debt while the economy is struggling to grow and create new jobs, the economic spokesman for the incoming centre-right government People's Party (PP) said on Monday.

'We mustn't raise taxes for the simple reason that the economy is at a standstill and at risk of entering recession and so raising taxes would mean less growth, more economic problems and more unemployment,' Cristobal Montoro said in an interview with COPE radio.

Spain is widely expected to slip in to recession by the beginning of next year, while the unemployment rate is more than double the European Union average as the economy continues to reel from a burst property bubble and a slump in domestic demand.

Incoming Prime Minister Mariano Rajoy has pledged to cut the deficit to 4.4% of GDP in 2012 from around 6.5% expected this year, implying the need for savings of around 20 billion euros.

Rajoy officially takes the helm next week when he is expected to detail reforms and name his cabinet.

Montoro said the 2012 budget, which is still to be drawn up, would have to be tight to deflate the shortfall, but he wouldn't specify where the PP planned to cut spending.

The outgoing Socialist government, trounced by the PP in November's election amid dissatisfaction over its handling of the economic crisis, increased value-added tax in July 2010 to 18% from 16%.

Some economists say Rajoy has room to raise VAT since Spain has one of the lowest rates in the euro zone. Germany, France and Britain all have between 19% and 20%.

Rajoy has said repeatedly his No. 1 priority will be to deal with unemployment. However, Montoro recognised it will be difficult to create jobs in 2012 given the stagnant economy.

More than one Spaniard in five is out of work and almost half of people under 25 and available for work are unemployed.

'What we have to do is reform the banking sector, the public sector and the labour market, and introduce greater competition in communications, energy and transportation, and open the way to economic growth starting after 2012, creating jobs, but to do so we'll have to overcome a very negative economic legacy,' he said.

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