Fears Spain’s GDP deficit could exceed 8% forecast

SPAIN’s public deficit for 2011 may be higher than the 8% of GDP forecast by the new government, the country’s economy minister said — fuelling fears the country faces a prolonged period of tight budgets and economic contraction.

Spain had originally targeted a 2011 deficit of 6% of GDP, but the newly elected conservatives said last Friday that the deficit would be 8%.

It said it would now have to work hard to hit this year’s tough deficit-reduction goals in an economy seen as tipping back into recession this quarter, and announced new tax rises and spending cuts.

“We’ll need to see, but it’s possible that we have gone over the 8% mark, though (we) expect that it hasn’t done so by much,” Spain’s economy minister, Luis de Guindos said during an interview with Cadena Ser radio, his first since taking the post after the conservatives won the November election.

The economy may contract in the first quarter of 2012, after shrinking in the previous three months, he said, reflecting analyst expectations that the Spanish economy is already in recession.

The eurozone’s fourth- largest economy has been a focal point of the debt crisis, as the previous Socialist government fought to deflate one of the highest public deficits in the currency bloc by introducing massive spending cuts and tax hikes.

Spain’s manufacturing slump showed no sign of letting up in December, adding to expectations that the battered economy will shrink in the next few quarters, a purchasing managers’ survey showed yesterday.

The euro fell to a decade low versus the yen yesterday, as concerns about the financing needs of indebted eurozone countries continued to weigh on the single currency.

Spain’s government announced additional tax hikes on Friday, worth an estimated €6 billion a year and spending cuts worth €8.9bn, with which it aims to reduce the deficit by one percentage point in the short term.

Spaniards, who handed the government of Prime Minister Mariano Rajoy the largest parliamentary majority in 30 years in the November election, are largely resigned to a tough few years, according to polls. Only 15.1% said they expected some recovery this year, while 37% believed the Spanish economy would fare worse in 2012 than in 2011.

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