UPDATE: Venezuela Hikes Taxes, Debt Plan As Oil Income Drops

Venezuela will hike taxes and issue more debt to deal with a collapse in the price of oil that is squeezing the government's finances and threatening the socialist agenda of President Hugo Chavez. The value-added tax will increase to 12% from the current 9% and the government will almost triple its domestic debt issue plans for 2009 to 34 billion bolivars ($15.8 billion) from the previous forecast of VEB12 billion. The measures are geared "to confront a great threat that originates in the economic model defended by the national bourgeois," Chavez said Saturday in countrywide television broadcast before unveiling the economic package. The president staunchly defended his government's socialist-inspired agenda and pledged that he would "protect what we've been achieving" as he listed scores of social projects which are behind a massive jump in public spending in recent years. The announcements will help Chavez offset the decline in the price of oil, but are sure to spawn new inflationary forces in a country that is already suffering the highest official price increases in the region. The president also ruled out a currency devaluation or increasing the price of gas, measures that some economists speculated were on the table. Fears of a devaluation pushed the dollar in the parallel market, where Venezuelans buy U.S. currency if they are turned down by the government, to VEB6.2 on Friday. Instead Chavez adjusted the government's oil forecast to $40 per barrel, down from the previous $60 per barrel estimate, which was used to draft the budget. The budget will be cut by 6.7%, shrinking it to VEB156 billion ($72.7 billion.) The government will also increase the minimum wage by 20%, divided in two 10% hikes later on this year. The boost is still well below last year's inflation rate, which closed at 32%. The announcements may not be enough for Venezuela to navigate the decline in the price of oil, which accounts for half of state revenue. "The spending cuts are very modest," said Tamara Herrera, an economist with Caracas-based research firm Sintesis Financiera. Herrera predicts stagnant economic growth this year and inflation of more than 40%. Despite Chavez's adjustment to the state's official budget, his government may face spending cuts that will go far beyond what was unveiled on Saturday, she said. Over the past few years, state spending has far exceeded budgeted amounts with help from windfall oil revenues, a process that has radically increased the size of government and propelled economic activity. Last year, for instance, total state spending closed at VEB88 billion ($40.9 billion), 37.5% higher than the original VEB64 billion budget for 2008. During his years in office Chavez has shown a penchant for announcing moderate economic measures and leaving more unpopular economic decisions to his ministers or to the state's Official Gazette. Economists have lately argued that the leftist leader could avoid weakening the bolivar if oil prices showed signs of stabilizing. More importantly, however, in recent months it has become a widely-held belief that the government has been selling some of its oil revenue dollars in Venezuela's parallel dollar market. If true this would net the government a higher amount of bolivars per dollar than what it would get from handing foreign currency directly at the fixed exchange rate. Economists say that if oil prices stay at the current level, Chavez will be forced to devalue the currency later on this year to shore up the government's finances. The decline in the price of oil, the economic engine of Venezuela, will likely mean that the economy will contract this year. Barclays Capital predicts a 4.1% contraction this year.