Mariano Rajoy's second Debate del Estado de la Nación, an ongoing dialogue about the state of the nation, has changed the direction of Spain's political economy and opened the way for a slight reduction to personal income and social security taxes. The Spanish people welcome both measures.
Until now, we have watched the Prime Minister raise taxes and break promises that he made during his electoral campaign. But an improving economy gives him some leeway to make necessary changes. Yesterday the Prime Minister raised the government's GDP growth expectation to 1% for 2014. Is that what we expected? Lowering taxes, which is obviously a campaign strategy, will affect 1.5 million taxpayers who already pay a relatively low amount in taxes, so the national impact is slight even though the people benefitting from the cuts will be happy. Still, at this point we don't have the right information or tools to judge whether the measure will be effective. For example, we know nothing about the way that tax structures will change. The weak tax cut will be overshadowed by lowering company social security contributions, which will go to a flat 100 euros for new job contracts.
The decision, which will go into effect immediately, will inspire job growth considering that companies will pay 80% less in taxes for an average salary of 25,000 euros. The reprieve will last two years. Starting in the third year, taxes will start to go up again, which means that companies did not get the permanent tax cuts that they asked for. Overall, the news is good, but likely not good enough to create lasting change. We need to explore other labor measures such as creating a single contract style, lowering taxes even more and cutting permanently the amount companies have to pay.
