The Prime Minister assured the public yesterday that he has not intentions of raising the VAT again even though the EU has asked him to hike the tax. But he did accept Spanish Socialist Workers' Party leader Alfredo Pérez Rubalcaba's offer to find a shared solution to stand up for the interest of Spanish citizens. Both approaches show that the government is thinking carefully about its feebleness, which was caused by stiff spending cuts that it was forced to adopt, a failure to deliver on the promises Rajoy made during his campaign and for following a tax policy that opposed the Peoples' Party agenda.
It seems that the government also knows that in a situation like the one we are in now, what the majority wants is not enough and it is better to get support from the strongest group in parliament. The Prime Minister knows that this is the quickest way to get the European Council to back measures that stimulate economic activity and jobs in Spain when it meets in June.
Especially since the EU just gave Spain two more years to reach a 3% debt/GDP ratio. Due to the depth of the recession, in 2013 it will be allowed to maintain a high 6.5% ratio, which is only four-tenths of a point less than in 2012. But the EU?s leniancy comes at a price.
In exchange, Spain will have to carry out immediate reforms to its pension system, public sector, proffessional services and labor sector. Plus, it will apply the VAT to a wider range of products. This tax measure will negatively affect growth so long as the EU does not consolidate its tax strategy.
Rajoy promised yesterday to carry out the necessary reforms, but he said no to raising taxes. Has he learned his lesson? If public accounts get balanced and reforms get carried out, then a tax hike won't be needed and Rajoy won't have to break his word again.
