The Spanish government has decided to follow the EU's guidelines as fears shared by the EU, IMF and Merkel turn into reality. After resisting for months, Rajoy now has no option but to comply with the road map that these institutions drew up for Spain at the end of May. What changed? In the five first months of the year, the national deficit reached 3.41% of the GDP. The prediction for the entire year was 3.5% (5.3% if including the rest of Spain's regional and town governments).
Falling revenues and increasing payments for regional governments and the Social Security system are emptying the state's accounts so much that Marta Fernández Currás, Secretary of State for the Budget, said that her department is starting to consider various tax increases. And the Ministry of Finance will cut home owner deductions and impose the céntimo verde, a tax on combustible fuels.
The impact of cutting deductions to home owners will not have a major impact, and we should remember that this very deduction contributed to the real estate bubble. Yes, the céntimo verde tax will affect fuel purchases and raise revenues somewhat, but the biggest issue is whether Rajoy will raise the VAT. If he does, the measure could slow down business activity as domestic consumption continues to flag. Business owners don't want the VAT to go up, and they are asking the government to abide by its promise to not raise these taxes.
Tourism and the hotel industry, the two sectors that have resisted the crisis, will be significantly affected should the VAT increase at the height of the tourist season. In the midst of a recession, raising taxes would put the brakes on a recovery. The only way to mitigate a tax increase would be to cut spending even more and meet the budget deficit objective.