Spain to resist Central Bank and EU calls for VAT rise
Following this week’s announcement of corporate and personal income tax rate cuts in Spain, the government has said it will not increase the Spanish VAT main rate following separate comments by the Central Bank and the EU’s ECOFIN Economic and Financial Affairs Council.
Calls for Spanish VAT increase to control deficit
The Bank of Spain joined others, including the IMF, which has suggested that VAT should be increased. Taxing spending is seen as preferable to taxing job-creating businesses. Spain raised VAT twice during the financial crisis, taking it from 16% to 21% by September 2012. But the government will avoid the VAT route this time as it faces an election next year. It will however modify some reduced VAT rates following a ruling by the European Court of Justice.
ECOFIN recommended that Spain raise its VAT rate to pay for a reduction in social contributions from workers.
Spain has one of the narrowest tax bases in the European Union, and the tax cuts come with many measures to eliminate tax breaks. The tax cuts for businesses and consumers is aimed at boosting confidence to stimulate demand. This gamble is betting that the economy will react quickly enough to cuts to make-up for the fall in government revenues and follow-on risk of missing the Euro currency membership criterion. The Spanish economy should grow be over 1% in 2014 following many years of zero growth.