Spain should raise taxes and cut government workers' pay to narrow its budget deficit, the International Monetary Fund said Friday.
The international lending group said that Spain's deficit is likely to exceed estimates and the government should therefore consider several measures to boost tax revenue.
The IMF suggests the government increase in its value-added tax, or VAT, which is a type of sales tax. Spain should also eliminate a deduction on mortgage payments for first-time homebuyers, which was recently reintroduced, the report notes.
Spain's Prime Minister Mariano Rajoy has resisted increases in the VAT. The previous government boosted it to 18 percent in 2010, though it remains one of the lowest in Europe.
Spain set a goal of reducing its deficit to 5.3 percent of gross domestic product, or GDP, in 2012. The IMF report called that goal "very ambitious" and said it would "likely be missed."
The IMF also criticized Spain in unusually blunt terms for missing its target in 2011. The report said that the large miss, which amounted to 3 percent of GDP, undermined Spain's credibility and "was exacerbated by maintaining the message, until almost the end of the year, that the deficit was on track."
Most of the planned reduction in the budget deficit in the next few years comes from spending cuts, the IMF's report said. But those cuts have yet to be specified, which makes it more likely that the deficit will "significantly overshoot targets" through 2015, the report said.
Spain should also consider cutting wages for government workers, the report said. Rajoy has frozen wages but resisted cutting them. The previous administration reduced government workers' pay 5 percent in 2010.
To make it more likely the spending cuts and deficit reduction will materialize, the IMF said, future VAT increases and public sector wage cuts could be planned, and then canceled if deficit-reduction targets are met.
European leaders agreed last weekend to provide Spain's government with a loan of up to $125 billion to bail out its ailing banks. That should give the Rajoy government some breathing room to continue the reforms its financial sector, the IMF said.
The government shouldn't reduce its budget gap too quickly, given its weak economy, the IMF said. It should focus on improvement over the medium term.
Spain has made progress on its budget deficit and recapitalizing banks, but investor confidence remains weak, the report said. That's driving up the country's borrowing costs.
The IMF's report paints a bleak picture of Spain's economy. Spain is in an "an unprecedented double-dip recession with unemployment already high," the report said.
Earlier Friday, Spain's central bank said the nation's public debt load has doubled since 2008.
The report from the Bank of Spain comes as the government is seeking to calm market fears that Spain, the eurozone's fourth-largest economy, might need a bailout.
The Bank of Spain said that total government debt, including the central, regional and local governments, equaled 72 percent of GDP at the end of March. That's up from 65 percent a year ago and 35 percent in early 2008.
That's still much better than Greece's debt, which stood at 165 percent of GDP at the end of last year. Italy's was 120 percent and Germany's was 81.2 percent.
Sainz reported from Madrid.