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Concern that Spain's public deficit will pass 8pc of GDP

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

Spain had originally targeted a 2011 deficit of 6pc of gross domestic product, but the newly elected conservatives said on Friday the deficit would be 8pc.

It said it would now have to work hard to hit this year's tough deficit-reduction goals in an economy seen 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 8pc mark, though (we) expect that it hasn't done so by much," Economy Minister Luis de Guindos said.

Friday's announcement that the deficit would be as high as 8pc of GDP has reignited market concerns about the financing needs of indebted eurozone countries and put downward pressure on the euro, which hit a decade low versus the yen yesterday.

Mr de Guindos said Spain's economy may contract in the first quarter of 2012 after shrinking in the previous three months, in line with analyst expectations that the eurozone's fourth-largest economy is already in recession.

Spain 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 the battered economy will shrink in the next few quarters, a purchasing managers' survey showed yesterday.

The government announced additional tax hikes on Friday worth an estimated €6bn a year and spending cuts worth €8.9bn, with which it aims to reduce the deficit by 1pc in the short term.

Treasury Minister Cristobal Montoro, speaking at a separate event in Madrid yesterday, said the government would announce new economic measures on Thursday after the weekly cabinet meeting, but these would not include further spending cuts.

Irish Independent