Spain will shift the burden of taxes onto consumption and reduce levies on employing workers in a plan to restart its economy by spurring exports, Economy Minister Luis de Guindos said.
The government will raise indirect taxes such as those on sales, cigarettes and alcohol from next year as part of efforts to eliminate Spain’s budget deficit by 2016, de Guindos said at a press conference in Madrid today. The plan will boost revenue by 8 billion euros ($10.6 billion) next year, he said.
The program comes at the end of a month that has seen Spanish bond yields rise above 6 percent for the first time since early December on concern that banking losses will swamp the public finances. Spanish unemployment, the highest in the European Union, rose to an 18-year high of 24.4 percent in the first quarter, data showed today. Standard & Poor’s yesterday cut the nation’s credit rating to three steps away from junk.
“We are living through perhaps one of the hardest moments for the Spanish economy,” Deputy Prime Minister Soraya Saenz de Santamaria said after the weekly Cabinet meeting. “The program contains the necessary measures to achieve the deficit goal this country has set itself.”
The ruling People’s Party, in power since December, had pledged during the election campaign not to raise sales tax. The U-turn follows measures announced on Dec. 30 to increase personal income-tax rates, when the government also created a new threshold for high earners.
Bank of Spain Governor Miguel Angel Fernandez Ordonez said on April 17 that additional permanent tax measures may have to be taken for Spain to meet its deficit targets, citing indirect taxation as the tool that would least distort growth. French President Nicolas Sarkozy has also increased value-added tax and cut social-security charges to bolster exports.
Shifting the tax burden towards consumption and away from labor costs may help Spain recover the competitiveness it lost since during the euro. The economy, which had a 10 percent current-account deficit at the peak of its debt-fueled property boom, will show a surplus from next year, de Guindos said.
The Cabinet also approved a plan to crack down on benefits fraud. The government will step up inspections to avoid people claiming jobless benefits while working in the informal economy and toughen penalties for fraudsters.
The PP government, which controls 11 of the 17 regions and secured the biggest parliamentary majority any Spanish party has won since 1982, also plans to merge some of the country’s 8,000 municipalities to save costs. It will present a plan to sell state-owned assets and take measures to boost growth such as extending shop-opening hours.
Spain forecast a primary surplus, with revenue exceeding all costs except interest payments, in 2013 and targeted an overall budget balance in 2016, compared with a deficit target of 5.3 percent this year. Government debt as a proportion of gross domestic product will peak next year at 82.3 percent and fall to 80.8 percent in 2015.
Economic expansion will accelerate from 0.2 percent next year to 1.4 percent in 2014 and 1.8 percent in 2015, the government said. Export growth will reach 8 percent in 2015 from 3.5 percent this year.
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