PUBLIC FINANCES

Government will not compensate pensioners for inflation impact

Consumer price index rose annual 2.9 percent in November, almost three times the official target

Poorer seniors to get two-percent rise next year

The government has decided to renege on a campaign pledge to compensate pensioners for a loss of spending power due to higher-than-expected inflation, opting instead to prioritize meeting the deficit-reduction target for this year, Deputy Prime Minister Soraya Sáenz de Santamaría said after Friday’s Cabinet meeting.

At a joint news conference with Sáenz de Santamaría, Labor Minister Fátima Báñez said: “This is one of the most difficult and painful decisions that we have taken.” The government for weeks had vacillated over whether to fulfill its obligation to top up pensions because of the over-run in inflation.

“We are aware of the effort we are asking of pensioners,” Báñez said. “We have no option other than to fulfill out deficit objectives,” she added, arguing that fiscal consolidation was essential for restoring growth and creating jobs.

The minister was speaking after the National Statistics Institute (INE) estimated the consumer price index fell 0.6 percent on an annual basis last month from October to 2.9 percent largely as a result of an easing in fuel prices. The official target for the full year is one percent. That would have meant the government finding an additional 3.8 billion euros, split between this year and the start of 2013, to offset the loss of spending power for retirees.

Pensioners had already suffered a freeze in their benefits under the Socialists

Inflation had jumped in September as a result of the increase in the standard value-added tax rate to 21 percent from 18 percent and in the reduced rate to 10 percent from eight percent.

The administration is already struggling to meet its target of reducing the public deficit to 6.3 percent of GDP this year. However, the secretary of state for the budget, Marta Fernández Currás, had said earlier this month that there was “room” to compensate retirees for the loss of purchasing power.

Sáenz de Santamaría said pensions would be raised by one percent next year and two percent in the case of those who received a monthly check of 1,000 euros or less. The latter group accounts for 6.6 million pensioners, or 70 percent of the total.

Pensioners had already suffered a freeze in their benefits in 2011 under the previous Socialist administration. The failure to top up benefits for inflation means that someone on the average pension in November of 835 euros a month will see their purchasing power cut by 105 euros a year.

Separately, the government said it would tap 4.5 billion euros from the pension system reserve fund to pay for the extra monthly payment due to retirees in December. This is the second time this year the administration has availed itself of the reserve fund, drawing down three billion in July.

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