Spain to review all taxes as deficit spirals

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Spain to review all taxes as deficit spirals

News Article Date: Tuesday 23rd of June 2009

Spain will review all taxes for the 2010 budget as it confronts a spiralling public deficit, aggravated by a new jobless benefit payment now expected to be approved before August, ministers said in interviews published on Monday. Treasury Secretary Carlos Ocana indicated that widespread tax increases were probable when the government prepares the budget in autumn, but that a rise in the rate of value-added tax was unlikely. The potential increases would follow rises in tobacco and fuel taxes to control a deficit that has risen faster than in any other euro zone country, bar Ireland, during the crisis. "When we present the budget, everything will be reviewed," Ocana told Spain's Cinco Dias newspaper, when asked if the government planned to raise direct or indirect taxes. "We have run out of room to increase the deficit." However, he added: "In times of economic difficulties increasing VAT does not necessarily mean increasing tax income." The government expects the budget shortfall nearly to triple this year after it launched one of Europe's biggest economic stimulus packages. Labour Minister Celestino Corbacho told Spain's El Pais newspaper in an interview published on Monday that the government expects to approve a new benefit payment in August for unemployed workers whose dole has run out. Spain will boost public borrowing by 16 billion euros to pay for the measure which unions have demanded as part of labour reform talks. "Before August there will be a deal that meets proposals to help this group that were employed, lost their jobs and whose dole has run out," Corbacho told Spain's El Pais newspaper. Unions are demanding a 400 euro a month payment for up to 1 million workers whose dole has run out after Spanish unemployment hit 18 percent in April, by far the highest rate in the European Union. REFORM Spanish Prime Minister Jose Luis Rodriguez Zapatero hopes to reach a deal next month between unions and employers to make collective wage bargaining more flexible, but has ruled out cuts in firing costs proposed by business groups. European Central Bank President Jean-Claude Trichet on Monday added his voice to calls for a more ambitious labour reform to ease Spain's unemployment problems. "The present situation suggests a need for labour market reform and wage moderation in particular by discontinuing wage indexation ... which is not a problem in the short term but in the long term is an issue in Europe," he said in a speech to the Nueva Economia forum in Madrid. Trichet said structural reforms in Spain would support an economic upswing and also the consolidation of public finances. The new unemployment payments will swell Spain's soaring public sector deficit after Bank of Spain warnings the government has run out of room for emergency spending and risks paying higher credit risk premiums. Signalling a shift in fiscal policy, Economy Minister Elena Salgado on Sunday said Spain would start to withdraw emergency fiscal spending in 2010 and was considering further tax hikes to pay for unemployment benefits. "The local investment fund, for example, will go from 8 billion euros ($11.09 billion) to 5 billion euros. The 3 billion euros to make the economy more dynamic is not forecast for next year," Salgado said of 2010 spending plans in an interview in Spain's El Pais newspaper.. The European Commission expects Spain to be the last European Union economy to exit recession, probably in 2011. Analysts fear it could face further sovereign credit rating downgrades without urgent action to curb public spending and borrowing. Public income will reach a low point in 2009, swelling the public deficit to 9.5 percent of gross domestic product, and revenues will remain at a similar level in 2010, Ocana said. In 2007 the government ran a record public sector budget surplus equal to 2.2 percent of GDP. Ocana said the government had to meet soaring unemployment benefit costs but would maintain research and development spending levels in the 2010 budget as it tries to diversify the economy away from construction and consumer spending.
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