OECD wants Spain tax rises if more consolidation needed

Spain should raise taxes further if its fiscal consolidation plan goes off course and reforms to pensions and banks are vital to boost an economy which will remain weak for years, the Organisation of Economic Co-operation and Development said. The OECD in a report published on Monday said that Spain was broadly on track to meet its deficit target 2011 but risks, such as weaker than expected growth, remained which could force the government to take additional measures.
"If (the risks) materialise, additional consolidation measures may need to be contemplated to reach fiscal targets," the report said. The OECD warned that the economy could see a sustained period of tepid growth, with gross domestic product expanding 1.8 percent in 2012, compared to a government forecast of 2.5 percent. The Spanish economy crept out of a year-and-a-half recession in the first quarter, but had stagnated by the third quarter as state-backed austerity measures and faltering consumer confidence weighed.
The economy resumed slow expansion in the first half of 2010, but growth is expected to remain subdued owing to the necessary further adjustments in the housing sector and a high degree of private indebtedness, the report said. Economy Secretary Jose Manuel Campa appeared to back the group's outlook on growth.
The OECD said the government should be ready to raise taxes further if needed, given risks over the sustainability of public sector wage cuts, optimistic growth targets and a lack of specified measures to restrain public expenditure after 2011. Spain raised VAT to 18 percent from 16 percent in July.
The report said that policies to restore investor confidence were essential to ensure funding costs remained moderate. The cost of financing at Spain's debt auctions has soared over the past two months on investor concern it could need a bailout package like Ireland or Greece. The Treasury is due to hold its last debt auction of the year on Tuesday when it sells 3- and 6-month Treasury bills, with yields likely to rise compared with their last sales.
On Monday the key risk premium on Spanish debt as measured by the spread between yields on its 10-year debt and eurozone benchmark bunds held at around 254 basis points. The organisation said the labour market reform in Spain was a cornerstone to re-balancing the economy, but efforts must be broadened and deepened and include changes to the collective bargaining system, where wage increases are set across whole sectors or companies.
Unemployment would remain high, it said, though should begin to fall significantly in 2011. Spain's unemployment rate was 19.8 percent in the third quarter of the year, around twice the eurozone average. Unemployment was also a risk for the mortgage loan books of the country's indebted savings banks, which could be hit further if interest rates rose in the euro area.