Increased taxes, higher retirement age and labour reforms are vital to boost country's economy
(Reuters) - If Spain's budget plan goes off course, the country should raise taxes further, said the Organisation for Economic Co-operation and Development (OECD). Also, reforms to pensions and banks are vital to boost Spain's economy, which will remain weak for years.
"If (the risks) materialize, 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 on Tuesday when it sells 3- and 6-month Treasury bills, with yields likely to rise compared with previous sales.
On Monday the risk premium that investors demand to hold Spanish debt rather than benchmark German bunds held at around 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.
The report said that policies to restore investor confidence were essential to ensure funding costs remained moderate.
Labour reforms
The OECD said labour market reform in Spain was a cornerstone for rebalancing 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 per cent in the third quarter of the year, around twice the euro zone 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.
The Paris-based organization said that while the resilience of the savings banks had been strengthened by restructuring, more reforms were needed, and they should look to further cut regional government control.
The report said the Spanish banking sector had withstood the crisis well, and emerged with abundant capital and provision buffers thanks to prudent supervision.
A pension reform, which the government said it will present at the end of January, was also essential and must include an increase in the retirement age to 67 from 65, the group said.
The OECD also urged the government to improve spending rules governing the country's autonomous regions, which account for 35 per cent of government spending, to ensure they did not overspend when the economy was performing better.
But Economy Minister Elena Salgado said that Spain's regions were carrying out their deficit cutting commitments, something ratings agency Moody's cited as a concern last week when it put the country's rating on review.
Salgado said the regional deficit was 1.24 per cent between January and September, and was on target to meet the goal of 2.4 per cent this year.
