Spain may need to raise taxes, says OECD

SPAIN SHOULD raise taxes further if its budget plan goes off course, and reforms to pensions and banks are vital to boost an economy which will remain weak for years, the Organisation for Economic Co-operation and Development (OECD) said.

In a report published yesterday, the OECD said Spain was broadly on track to meet its 2011 deficit target but risks remained, such as a long period of weaker-than-expected growth. Gross domestic product could grow just 1.8 per cent in 2012, compared with a government forecast of 2.5 per cent, it said.

“If materialise, additional consolidation measures may need to be contemplated to reach fiscal targets,” the report said.

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 today when it sells three- and six-month treasury bills, with yields likely to rise compared with previous sales.

Yesterday the risk premium that investors demand to hold Spanish debt rather than benchmark German bunds held at around 254 basis points.

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.

Applying higher value-added tax across a wider range of goods and services would be one way to raise revenues, it said. – (Reuters)