Spain passes decaffeinated tax reform compromising fiscal consolidation

Brussels is in arms about the Spanish fiscal reform: IVA won’t rise, social contributions won’t be reduced, special taxes aren’t modified and deductions mess isn’t removed.

Madrid preferred not to execute a comprehensive tax reform and focused on two tax types: income and corporate taxes. Both reductions could mean more than €9bn in two years but the Foundation for Applied Economic Studies (FEDEA) highlights the reform is “an insufficient bunch of mere adjustments in income tax to reverse year 2012’s  rise”.

According to Afi’s experts, the reform is questionable as regards fiscal sustainability. Keeping up with a 37% GDP income needs a public spending decrease from 44.9% to 40.1% in order to meet deficit targets. The adjustment won’t be easy and anyway it would negatively impact on economic recovery. Moreover, a lower public spending may compromise basic services such as education and health care.

The EU conveyed its doubts about fiscal reforms: “We are concerned since some measures could make it difficult for Spain to meet the fiscal targets. This is an issue we will thoroughly go over once we have full details of what’s done.”

That is a politically correct way to show their disappointment about a reform they were not informed about and which is far from EU’s mindset.

Some of the measures have taken citizens by surprise, like tax cuts to the self-employed, savings tax (dividend exception will be eliminated and a €8,000 limit for pension scheme tax relief), the reduction of public aids for house renting and the tax on compensation when a worker is fired.