Professor Tierno Galván said that the programs that Spanish Prime Minister Mariano Rajoy based his electoral campaign on ideas and programs that he never intended to carry out. And now Rajoy and his government are vindicating this striking, cynical view.
Not too weeks after Rajoy took office, he reneged on promises made during his campaign by raising Spain's personal income and property taxes, known as the IRPF and IBI, respectively. And yesterday he increased the tax burden on citizens even further by announcing that in 2013 he will raise Spain's value added tax (VAT) and several other special taxes.
Raising the VAT is a "uncooperative, unjust, counterproductive and ineffective measure," Rajoy said in opposition to a 2% increase levied by Zapatero's government in 2010. Increasing the VAT from 16% to 18% was then seen as a "truly crazy idea" because it put the most tax pressure on the weakest economic class and did little if anything to increase overall tax revenues.
"Raising the VAT would intensify our economic trouble," assured Spain's Minister of Finance, Cristóbal Montoro on January 15. And in the same tone as the Prime Minister, the Minister of the Economy Luis de Guindos rejected an increase to the VAT because "it won't increase revenues."
But in a press conference after a cabinet meeting on Friday, Luis de Guindos announced that the Spanish government is going to raise the VAT in 2013 in order to try and meet its 3% debt/GDP goal.
Government will raise the VAT from 18% to 20% and also levy higher taxes on gas, tobacco and alcohol. It euphemistically describes the heavier overall tax burden as a "modification of Spain's tax structure."
The increase will go into effect in Spain at the same time as national consumption falls to depressing lows. The 1.9% decline in GDP from Q1 2012 reflect this ongoing trend in the country.
With higher taxes on consumption, which will be accompanied by cuts to social security contributions, the national government is trying to earn an additional 8 billion euros in tax revenues. This plan follows the former government's plan, which attempted to raise 6.5 billion euros when it increased the VAT from 16% to 18%.
With the 20% increase to the VAT, Spain will get closer to the European average (20.9%) for this consumption tax.
"What we are trying to do is, at a time when we would like to increase our ability to compete internationally, reduce the tax burden on labor, which at this time is being hurt badly enough, and increase taxes on consumption. The target net increase in tax revenues would be around 8 billion euros," explained De Guindos by way of justifying raising taxes.
Still, the Minister of the Economy also admitted that the need to respond to measures that international organizations such as the International Monetary Fund (IMF) are requiring of Spain is another motive that has influenced the Government's decision. He also added, "the indirect problem of raising consumption taxes during times of recession is that it intensifies the lack of demand, but that will happen in 2013."
During the presentation of the 2012-2015 Stability Program and 2012 National Reform Program, Luis de Guindos spelled out the foundations of the tax increases and explained the need to "turn Spain around from a competition standpoint." In this respect the minister explained that fiscal consolidation in 2012 would reach 30.26 billion euros and 19.60 euros in 2013 and thereby cut the national deficit to 5.3% this year and 3% in 2013.
EU mandate
Although De Guindos mentioned the IMF as one of the organizations that insisted on Spain increasing its consumption taxes, the measure was also supported, or at least recommended, by the EU via Angela Merkel.
Recalling that last year the European Commission asked Spain to reduce required social security taxes and make up for the loss in revenues by increasing the VAT or energy tax. It claimed that doing so would create jobs by lowering employers' labor costs.
The EU highlighted then that Spain had shown a "sharp spike" in labor costs since the late 1990s, which has created higher inflation and flagging competition.
"Finding the leeway to reduce a relatively high social security tax in order to shave non-salary labor costs would help boost competitiveness," it noted.
In this sense, the European Commission explained that "taxes on energy, especially those on combustible fuels, are relatively low in Spain and provide an opportunity for increasing revenues." It added, "Modifying the structure and rate of the VAT would also help."
Zapatero's government rejected this measure and gained support from other European countries to sideline tax increases when it received 2012 budget recommendations from the EU. The former government claimed to the EU that Spain's social security and pension systems are mostly financed by taxpayer contributions and that cutting rates would risk their sustainability at a time when the EU itself was requiring Spain to push back the official retirement age.
The EU also argued that Spain had already tried unsuccessfully to lower social security taxes and raise the VAT in 1995. Why unsuccessfully? Because the deficit rose and the VAT increase did nothing to increase overall tax revenues. Despite everything, on April 18 the European Commission recommended once again that its member nations lower social security taxes and increase the VAT in a collective effort to create jobs.
