Moody's estimates Spain needs to find savings of 40 billion euros to meet budget deficit target

Spain needs to find budget savings of 40 billion euros if it wants to meet its deficit target for this year of 4.4 percent of GDP, Moody's Investors Service said in a report released Monday.

The figure is 42.8 percent higher than the combined savings cuts and tax hikes implemented between 2010 and 2011. At the end of last year, the incoming Popular Party government unveiled tax hikes of 6.2 billion euros and spending cuts of 8.9 billion after announcing the outgoing Socialists' administration overshot its deficit target for last year of six percent of GDP by two full percentage points.

Moody's said the situation it depicts is "negative" for Spain's credit profile, and warned further austerity measures are required to return the state's finances to a "sustainable" path. On announcing the December 30 package, the government said the adjustments were only the "beginning of the beginning."

The ratings agency said having to tame the deficit at a time when the economy is already weak risks further aggravating Spain's economic prospects. It predicted GDP would contract by between 0.5 and 1.0 percent this year, compared with growth of 0.7 percent last year.

Meanwhile, Finance Minister Cristóbal Montoro on Monday said the government did not plan to raise the value-added tax rate to rein in the deficit, and insisted that hikes in the personal income tax and the valuation-based municipal tax (IBI) were only temporary.

Moody's said having to undertake a "massive fiscal adjustment" at a time when the economy is already weak risked further aggravating Spain's economic prospects. It predicted GDP would contract by between 0.5 and 1.0 percent this year, compared with growth of 0.7 percent last year.

The ratings agency also said the government's plans to raise some eight billion euros by stepping up its battle against tax fraud were difficult to execute.

While ruling out including a hike in the current standard VAT rate of 18 percent in the 2012 state budget, Montoro said the administration would be introducing further measures to ensure the sustainability of public finances. Last week, Economy Minister Luis de Guindos said the government could not rule out an increase in VAT.

The minister predicted that people would be paying lower tax rates at the end of the government's four-year mandate as the economy recovers and there are more people in work, thereby swelling the tax base. "We're going to be paying less tax, including those who started the year with hikes," Montoro said.

In an interview with Spanish radio station Cope, Montoro insisted that raising personal income tax and the IBI was the least painful and fairest way to rectify the overshooting of the budget deficit target last year.

"I'm laughing because we have fazed the left by showing that we are capable of making a fair adjustment," the minister said. "The left who have governed in this country weren't able to do what we have done."