Spain plans tobacco tax hike to cut deficit-source

Spain's government is planning to raise tobacco taxes, a government source said on Friday, as it fights to cut its high budget deficit and calm investor concerns that it could need a financial bailout like Ireland and Greece.

Proposals for such new austerity measures come just over a week after Spain's prime minister insisted it would not need a new round of cuts, and said those betting the country would end up going the same way as Dublin or Athens would lose.

The source, who asked not to be named, did not comment on newspaper reports that the government is also mulling higher taxes on fuel and alcohol.

The new tobacco tax to raise an estimated 1 billion euros ($1.3 billion) a year in revenue could be announced as early as Friday after Prime Minister Jose Luis Rodriguez Zapatero's weekly cabinet meeting, newspapers reported.

The cabinet meeting is expected to approve other measures announced by Zapatero this week involving the sell-off of parts of its airport and lottery businesses to raise funds.

Spain's cost of financing has risen to record highs in recent days on fears it could end up needing a bailout like Greece or Ireland, throwing the euro currency deeper into crisis.

But the yield on benchmark Spanish 10-year bonds ES10YT=TWEB was lower on Friday, at 5.1 percent, as the European Central Bank said its bond-buying programme has been energetic this week [ID:nFAE005845].

Economy Minister Elena Salgado told BBC radio on Friday that the euro zone could not exit its current crisis unless its members adopted common economic policies, a controversial idea not shared by all the currency zone's leaders. [ID:nLDE6B208U]

"We have to improve economic governance in Europe. You cannot have in the long term a common currency without a common economic policy," she said in an interview.