The Spanish government has agreed to raise its VAT tax between 2-3% despite initial claims that it would not do so. Rajoy communicated this message to his team and the Confederation of Spanish Employers. This decision is a new development that stems from pressure from the EU and the Prime Minister's efforts to regain investor confidence.
The government agreed to grant the European Central Bank the right to audit the financial sector. And it will hold regional governments fully accountable for meeting their deficit objectives and not wait until 2013 to raise the VAT. These three actions are part of the government?s attempt to strengthen the weakest flanks that have led investors to pull out of Spanish investments: the financial sector and the government's attempt to reach its 5.3% deficit objective.
The European Commission's criticism of Spain's stability program focuses on two aspects, both of which relate to the decisions it has adopted. First, the Commission is critical of Spain maintaining a relatively low VAT when it can safely raise this tax by three percentage points, because Spain currently is in the lowest tax band in Europe for this tax. Raising the tax would have an immediate and widespread effect on government revenues. Business owners fear that the tax would affect consumption and tourism, but they will back the government nonetheless. It would have been better to begin by raising the VAT and to not have touched the personal income tax.
Second, the EU views regional governments and Social Security as two problem areas, because accounts don't square for both. Social Security could come up short by more than 7 billion euros in the fall due to the rise in unemployment.
