Rise in taxes faces Spain if its austerity measures fail

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 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 percent, it said.

"If (the risks) 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 about 254 basis points.

The Spanish economy crept out of a year-and-a-half recession in the first quarter, but had stagnated by the third quarter under the weight of state-backed austerity measures and faltering consumer confidence.

Economy Secretary Jose Manuel Campa appeared to back the OECD's outlook on growth, which it said was likely to be held back by the aftermath of a housing bubble and a high degree of private indebtedness.

"GDP was zero in the third quarter and it will probably be moderate in the fourth... This will continue next year with growth rates getting better every time but still soft," he said at a conference in Madrid.

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. Spain raised VAT to 18 per cent from 16 per cent in July. It said policies to restore investor confidence were essential for the country.