Spanish Prime Minister Zapatero defends plan to raise taxes in the middle of recession

MADRID — Spain's prime minister on Monday defended his plans for euro11 billion ($16 billion) in tax hikes even though the country is stuck in recession.

The government must boost revenue to chip away at a deficit ballooning from payment of unemployment benefits and other spending, Jose Luis Rodriguez Zapatero said on Cadena Ser radio.

He said the government has to keep Spain from smothering in debt, even if tax hikes during hard economic times are a bitter pill. Even with the tax increases, the draft foresees a central government deficit in 2010 equivalent to 5.4 percent of economic output, 8.1 percent if regional governments are included.

Both are far above the 3 percent limit set by the European Union.

It is a leader's responsibility, Zapatero said, "to do things when they need to be done, and with an eye to the future."

The Cabinet approved a draft budget Saturday and it will now go to Parliament, where Zapatero lacks a majority. He will need support from smaller parties to get the bill passed, and start negotiating with them this week. He will probably have to make concessions, in particular to leftist groups and a moderate Basque nationalist party.

Among other things, the bill calls for raising value-added taxes paid by consumers at the point of sale and levies on bank interest and stock dividends.

A euro400 ($587) tax rebate to all taxpayers starting last year will be eliminated.

Labor unions have criticized the package by saying the working class, not wealthier Spaniards, will be hardest hit.

Conservative opposition leader Mariano Rajoy said Sunday the rise in VAT will hit lower earners proportionately more because the rate is the same for everyone, instead of increasing for higher incomes.

In the interview on Monday, Zapatero insisted there was a progressive element to his proposals: the rate on capital income will rise from 18 to 19 percent up to euro6,000 ($8,800), but beyond that threshold the levy will be 21 percent.

He said he was targeting this source of income because "it is where the people with money and considerable wealth are." Still, of all the new money the government hopes to bring in, this particular tax hike is expected to generate only euro800 million ($1.173 billion) out of the forecast total of euro11 billion. The biggest single chunk will come from eliminating the tax rebate.

If approved, the value-added tax increase would not take effect until July of next year, by which time the government hopes the economy will be growing again.

The unemployment rate stands at an EU-high of 17.9 percent. The budget draft approved Saturday foresees economic contraction of 3.6 percent this year, and a further 0.3 percent in 2010.

Spain's once-buoyant economy slid into recession over the past two years as a boom fueled by construction and consumer spending came to an end.