Spain likely to raise taxes in wake of coronavirus crisis, say experts

EL PAÍS has consulted several economists about the measures the government can take to recover from the financial fallout of the pandemic

A store in downtown Madrid offering discounts.
A store in downtown Madrid offering discounts.Jaime Villanueva
Laura Delle Femmine

The coronavirus crisis has devastated the Spanish economy, leaving the public coffers with debt levels not seen since the beginning of the last century. All indications suggest that the Spanish government will need to introduce new measures to get the economy back on track. The question is how. According to several experts, Spain may decide to increase taxes, cut social spending or raise the retirement age.

It is still too soon to know what life in Spain will be like after the pandemic. But the magnitude of the crisis indicates that adjustments will need to be made in the future if the country is to compensate for the huge increase in spending on healthcare and social protection. The public coffers have come under pressure from the loss in revenue, estimated at around €25.7 billion. Both the Tax Authority (Airef) and the Bank of Spain have indicated that adjustments will need to be made to replenish the depleted treasury. This typically translates to spending cuts and tax hikes.

“As a country we have to decide: do we dismantle part of the welfare state or increase revenue?” says Ignacio Conde-Ruiz, an economics professor at Madrid’s Complutense University and the deputy director of the Foundation of Applied Economic Studies (Fedea).

“It’s certain that an effort will be asked for, but it has to be done very carefully so that investment is not slowed down,” says Valentín Pich, president of the Council of Economists.

As a country we have to decide: do we dismantle part of the welfare state or increase revenue
Ignacio Conde-Ruiz, Complutense University

With corporate profit hit by the fall in revenue and consumption, raising taxes now would be counterproductive, according to the economists consulted by EL PAÍS. But the moment the situation stabilizes, the government will need to make a decision: increase revenue or reduce spending.

The government estimates that growth will fall by 9.2% in 2020, that debt will rise to 115.5% of Gross Domestic Product (GDP) and that the deficit will reach 10.3% (more than €100 billion). Some experts view this forecast as overly optimistic, and warn it could worsen if there is a new coronavirus outbreak in the fall.

The economy, however, is expected to bounce back in 2021. The question is “whether it will be enough to not have to put the public accounts in order,” explains Francisco Pérez, the director of the Valencia Institute of Economic Research (IVIE) and a professor at Valencia University. Pérez points out that there will be lower spending on healthcare as the outbreak comes under control, but that other measures, like the planned guaranteed minimum income scheme, will continue to require funding.

Finance Minister María Jesús Montero has stated that there will not be “massive spending cuts or massive tax hikes.” The government, however, plans to approve the so-called “Google tax” on digital services, and another levy on financial transactions, by the end of the year. But together these would only raise an estimated €1.8 billion, not even two tenths of a point of the deficit. The anti-austerity party has also proposed a wealth tax that would affect people with assets worth over €1 million, but this does not appear to have much backing.

Finance Minister María Jesús Montero has stated that there will not be ‘massive spending cuts or massive tax hikes’

José Carlos Díez, from the University of Alcalá, believes that the government will have to make adjustments to pensions. This represents one of the government’s biggest spending commitments – €2 out of every €5 collected in taxes goes towards pensions, and in 2019, the cost was €135 billion. Díez suggests that the retirement age should be raised right now to 67, instead of in 2027. The economist also believes that the highest brackets of personal income tax (IRPF) and value-added tax (IVA) should be increased.

Jorge Onrubia, who teaches economics at Madrid’s Complutense University, has a different view. “I do not support cutting pensions or civil servant pay, nor do I see the current government doing this, unless the European Union forces it to,” he says.

For now, Brussels has decided not to ask EU members to make cuts, despite the high levels of debt and deficit. But it has already noted that when the storm passes, states will have to return to the path of fiscal consolidation.

English version by Melissa Kitson.

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