Spain cancels 2012 pension review to meet deficit

 

Spain will not raise pensions in line with November inflation this year as normal, the government said on Friday, as high inflation means doing so would jeopardise its deficit targets.

The government will however raise pensions by 1 -2 % and tap reserve funds to ease liquidity tensions around pension payments until the end of the year.

Spain's fiscal situation left no choice over the decision as meeting a deficit target of 6.3% of output remains the top priority for Spanish authorities, the 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 at a news conference following the weekly cabinet meeting.

The PM had said earlier this year that he would protect pensions, the only remaining campaign pledge he had not been forced to break as Spain was dragged into the centre of the euro zone debt crisis.

Under Spanish law, pensions should be reviewed each year in line with the inflation data of November, which emerged at 2.9% on Friday. By not applying the rule, the government will save €3.8 billion and keep its EU-agreed deficit target within reach.

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

The government also said it had passed a new law to unlock the pensions reserve fund.

Just last week Secretary to the Treasury, Marta Fernandez Curras, said how there was room in the state budget for an increase in pension payments to take into account rising inflation this year.