Spain Increases Taxes to Tame Deficit Amid Recession
Spain will raise value-added tax and levies on savings as the government seeks 11 billion euros ($16.2 billion) to tame one of the euro region’s largest budget deficits even as the economy is still mired in recession.
Value-added tax will rise to 18 percent from 16 percent, and the reduced rate will climb one percentage point to 8 percent on July 1, 2010, Finance Minister Elena Salgado said. The central government’s deficit will be 5.4 percent next year, tighter than a 5.7 percent estimate in June, and the overall deficit will be 8.1 percent, compared with a previous forecast of 8.4 percent.
Tax on income from savings will also increase, to 19 percent on the first 6,000 euros and 21 percent for the rest, and a 400-euro annual rebate for all taxpayers will be scrapped. Of the planned 11 billion euros, 6.5 billion euros will be raised in 2010.
Even as the Spanish economy remains mired in a recession and may take longer to recover than the rest of Europe, Spain’s government is among the first to raise taxes as it seeks to control a ballooning budget deficit that has increased its borrowing costs. The government is boosting welfare benefits at a time when the highest jobless rate in Europe is draining public coffers, and the Organization for Economic Cooperation and Development expects Spain will run the euro region’s second- largest deficit after Ireland this year.
Ireland, Finland
Ireland, which unlike Spain had to bail out its banking sector and faces an even deeper economic contraction, raised taxes in April in an emergency budget. Finland plans to increase value-added tax by 1 percentage point on July 1 next year.
Spain plans to raise 5.7 billion euros by scrapping the 400-euro tax rebate, and 5.2 billion euros from the VAT hikes, the ministry said in a presentation.
European policy makers including EU Economic and Monetary Affairs Commissioner Joaquin Almunia have said it is too early to implement strategies to end extraordinary fiscal and monetary policies no fax cash loans. Spain will continue its stimulus efforts next year.
Standard & Poor’s cut Spain’s top AAA credit rating in January and the extra interest that investors demand to hold Spanish debt rather than German equivalents is 51 basis points, four times more than it was at the start of 2008. The extra interest, or spread, has come down from 128 basis points in February, a record in the euro’s lifetime. Moody’s Investors Service rates Spain Aaa and said Sept. 9 it was unlikely to cut that rating.
Debt Burden Grows
Debt will amount to 62.5 percent of GDP, Salgado said. Spain’s debt burden was 40 percent of GDP in 2008, compared with 69 percent for the euro region overall. This year’s public- sector deficit, forecast at 9.5 percent, will be the widest since at least 1980, according to Finance Ministry data that don’t take into account a change in methodology in 1995.
Salgado maintained forecasts for the economy to shrink 3.6 percent this year and 0.3 percent in 2010.
At 16 percent, the Spanish standard rate of value-added tax was one of the EU’s lowest after Luxembourg and Cyprus, according to the EU statistics office. Spain’s overall tax burden, or revenue as a share of GDP, will rise 1 percentage point, Salgado said, and remains below the EU average, which Eurostat estimates was 39.8 percent in 2007.
The draft budget will be presented to parliament next week, where the government doesn’t have a majority and will have to secure the support of smaller parties to get the bill approved. Parliament has until the end of the year to pass the bill.