EURO CRISIS

Spain to bow to Brussels’ VAT-hike proposal

Commission to relax terms of deficit-reduction program to allow for 6.3-percent overshoot this year

Finance Minister Cristóbal Montoro on Monday flagged an imminent hike in indirect taxes, including value-added tax, to help Spain meet the expected relaxed terms of its deficit-reduction program.

Speaking at a financial seminar, Montoro justified the need to raise excises to compensate for tax fraud. “If more of the people who are supposed to pay VAT paid it, we wouldn’t have to increase the rate by so much,” Montoro said. “I can’t say it more clearly.”

Montoro was speaking as European Union officials confirmed that Brussels will give Spain another year to reach the EU ceiling for public deficits of three percent of GDP, subject to a series of conditions, including a hike in VAT, receipts of which have fallen some 10 percent since the start of the year as the country slipped back into recession.

The minister indicated VAT could be hiked within the next few days after previously ruling out such a move. The European Commission had urged the administration of Prime Minister Mariano Rajoy to increase VAT.

The government is also considering heeding another recommendation by Brussels to raise environmental taxes, which currently amount to only 1.62 percent of GDP annually, compared with a European average of 2.6 percent.

If it takes on board its proposals, Brussels will allow Spain to have a deficit of 6.3 percent of GDP, compared with a target of 5.3 percent in its current Stability and Growth Program. In 2013, Spain could overshoot its spending plan by 4.5 percent, when it was originally required to narrow the gap to three percent. The limit imposed by Brussels for 2014 is 2.8 percent of GDP.

The tax burden in Spain is currently the lowest in the developed world"

Other measures the Rajoy administration is considering include removing the across-the-board tax breaks on mortgage payments on the family home. The government is also mulling a further increase in the working week for civil servants and bringing their working conditions more into line with those of the private sector.

Montoro said the recommendations made by Brussels for Spain were “quite explicit.” “Spain needs to carry out the cutbacks necessary to reach the [deficit] target, and this will be debated Tuesday in Ecofin,” he said of the EU finance ministers’ meeting.

The minister said there was scope to raise VAT rates because they are currently low compared with other countries. The super-reduced rate is currently four percent, the reduced rate eight percent and the standard rate 18 percent.

“The tax burden in Spain is currently the lowest in the developed world,” Montoro said, adding that tax receipts in Spain had fallen by seven percent of GDP since 2007, equivalent to 70 billion euros.

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