VAT will increase sooner rather than later

Spain's dependence on Brussels should be evident after the crisis. Therefore, it is not surprising to think that, no matter what our Minister of Economy says, his recommendations will be heeded later or sooner.

Among the recommendations set out in all the reports of international bodies such as the IMF or even more interesting the European Commission on Spain refer to the increase in VAT. More specifically, the gradual abolition of the reduced (10%) and super-reduced (4%) rates for this levy. This is a measure that the various governments have so far refused to take. However, this advice is framed within the framework of these institutions' commitment to further increase indirect taxation (more regressive by taxing equally regardless of the taxpayer's income) to the detriment of direct taxation, where progressiveness is a priority depending on the wealth of each person.

For this reason, in their proposals, in addition to VAT, they also advocate increasing the tax on mineral oils (another type of indirect tax), especially diesel to encourage the use of less polluting fuels.
In any case, the tax recipes of the crisis have been along these lines, as shown by the fact that in most euro-area countries - including Spain - they have increased VAT during this period and at the same time have approved reductions in company rates.

Direct taxes continue to account for the majority of Spanish tax revenue due to the enormous weight of personal income tax in the tax system. However, the presence of direct taxation has been significantly reduced during the crisis. Thus, while in 2007 their revenues accounted for 59.8% of the total a decade later, their weight in the tax cake dropped significantly to 53%, according to data from the Tax Agency.
Indirect taxation, on the other hand, has followed the opposite path. Before the crisis, revenue collection accounted for 39.3% of the total and in 2017 will rise to 45.7%.

The European Union is warning of the need for a new effort.

This effort for the European Union Spain is 10,000 million euros spread over two years. Indirect taxation is the way to achieve this.

The Union proposes to reduce the number of goods and services benefiting from a reduced VAT rate, such as food, passenger transport or restaurants. In addition, the Commission reiterates the need for' strict' controls at all levels of government and for increased vigilance over public tenders.

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"The number of bad practices that have had an impact on the implementation of European legislation has been significant. The data show that there are disparities in the implementation of public contracts,"warns the European Commission, which criticises the fact that Spain continues to publish few tenders and negotiate many contracts. "This translates into less competition with implications for higher government spending,"says the recommendation paper.

Brussels bases these new targets on its new growth estimates. It considers that the Spanish economy will advance by 2.9% this year although it will slow down in 2017 and 2018 with growth of 2.3% and 2.1% respectively. That is to say, the advance will remain robust but with uncertainties on the horizon derived from the brexit process that could have implications "for trade and domestic demand".

In addition to a draft budget, the Spanish Government will also have to submit a parallel report with the necessary budgetary efforts in which it will have to detail the objectives in terms of expenditure and revenue and specify the measures adopted to comply with European recommendations. Only if both years are satisfactory and Spain responds on time, will part of the structural funds committed for 2017 be released. A sufficient incentive, in the opinion of the Community Executive, for Madrid to do its homework. Although it is not the only ace kept by the European Commission. This is not the end of the story ", recalled Commissioner Pierre Moscovici a few days ago. If Madrid continues to miss the next step, it will be even more painful: an automatic fine of 0.5% of GDP or EUR 5 billion, although the Commission has already explained that there is no specific date for this. In any case, it is a real possibility that hangs over the head of the future government.