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Spain considers tax hikes to curb deficit, please EU

Source: Reuters - Tue 26th Jun 2012
Spain considers tax hikes to curb deficit, please EU

Spain is considering raising consumer, energy and property taxes, the government said on Tuesday, as it struggles to reduce a public deficit that may have already exceeded one of its budgeted ceilings for the full year.

Underlining the state of Spanish finances as it negotiates an international bailout for its banks, the central government deficit was 3.41% of GDP from January to May, close to a end-year target of 3.5%, Treasury data showed.

Madrid is under intense pressure by nervous debt markets to tame one of the highest public shortfalls in the euro zone and the government will be hoping to have a new slew of austerity measures to show European leaders at a summit later this week.

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The high central government deficit figures were due to early cash transfers of almost 9 billion to Spain's struggling regions had stretched the deficit to 36.4 billion by the end of May, the Treasury said. Excluding the transfers, which are made each year but were paid early this time to help the cash-strapped regions, the deficit would have been 2.38% of GDP, it said.

The central government deficit, announced on Tuesday, does not include figures from the social security system or the 17 devolved regions.

At the end of Q1, and thanks to the payments, the regions were ahead of their targets, though whether that will bring the overall shortfall in line with end-of-year goals will not be known until mid-year regional accounts are published.

With the economy in its 2nd recession in 3 years slashing the total Spanish deficit from 8.9% of GDP last year to 5.3% this year, as has been pledged by the government, remains a serious challenge.

The PM has announced tax hikes and spending cuts worth around 45 billion, but he had so far resisted calls from the EU and the IMF to rise the rate of IVA.

COUNTERPRODUCTIVE ?

In an unexpected move two days before the EU summit where measures to ease the pressure on Spain's borrowing costs will be discussed, the government said on Tuesday it was now considering increasing the rates on certain products and services.

Madrid's short-term lending costs nearly tripled at an auction on Tuesday from a month earlier while demand for the paper shrank as investors demanded ever higher premiums to hold Spanish debt.

Spain's current VAT rate is 18%, one of the lowest in Europe, but many products are charged at a reduced 8% or a "super-reduced" 4%.

"The ministry is studying reclassifying certain products and services that have reduced or super-reduced VAT," a spokesman for the ministry said.

Madrid is also considering eliminating tax breaks on housing after reintroducing the measure as one of the first decrees the center-right government announced after being sworn in December.

It is also considering introducing a so-called "green tax" on petrol, following recommendations by the EU, Treasury Secretary Marta Fernandez Curras said.

However, with the economy contracting at very quick pace, some say increased austerity could be counterproductive.

Mark Miller, an economist at Capital Economics, said hitting the deficit target "is going to be pretty tough the way things are going. There's a lot of austerity in train, but economic activity is slowing sharply too."

The low activity is already hitting tax receipts, with revenues from value added tax down 10.1% in the January-May period from a year earlier, the Treasury said.