Government will raise VAT in 2013 in bid to comply with deficit targets

Economy Minister De Guindos outlines “hike in indirect taxes” IMF report on “masked” bad loans in banking sector raises bailout concerns

The government hopes to raise some eight billion euros next year by raising “indirect taxes,” including the value-added tax (VAT), to help meet the country’s Herculean goal of bringing down the budget deficit from 8.5 percent of GDP to three percent in two years, Economy Minister Luis de Guindos said Friday.

Although he tried to avoid mentioning VAT by name, De Guindos explained after the weekly Cabinet meeting that the measures are part of a complete “tax restructuring” aimed mostly at consumers. Taxes will also be raised on alcohol, tobacco and gasoline.

“In economic terms, we are talking about a hike in indirect taxes,” the minister said, explaining that the measures are part of a broader economic stability plan approved by the Cabinet to show Brussels and the International Monetary Fund that Spain is complying with its goal to reduce its deficit.

To compound the government’s concerns about an external intervention, this week the IMF said it believes that Spanish banks may be at higher financial risk than thought because some may be “masking” a series of bad loans.

In economic terms, we are talking about a hike in indirect taxes”

De Guindos was pressed by journalists on whether VAT would be hiked. “One tries to speak as specifically as possible. Indirect taxes are taxes on the consumer. There are other special taxes, not only VAT,” he said.

The Popular Party (PP) government had insisted in the past that it would not raise VAT so as not to burden consumer spending. In fact, the PP was highly critical of the previous Socialist government of José Luis Rodríguez Zapatero for raising VAT from 16 percent to 18 percent in July 2010 to rake in an additional 6.5 billion euros.

But De Guindos said that families next year should be better prepared to spend more. However, based on the figures he presented to reporters, consumer spending will remain low next year.

The minister also linked the raise in taxes to help make up for the drops in social security payments due to the nation’s high unemployment, which now stands at 24.44 percent.

Part of the government’s plan to reduce the public debt will entail a privatization plan, which will be mapped out in the near future, De Guindos said.

Based on the minister’s calculations, Prime Minister Mariano Rajoy’s government wants to reduce the deficit in 2013 to three percent, 2.4 percent in 2014, and 1.1 percent in 2015, and expects to have a balanced budget by 2016.

Meanwhile, Labor Minister Fátima Báñez announced several new measures to combat social security fraud, and make it harder for companies to place elderly workers in the front line of firings when employers announce layoffs.

Between February 1-21 and April 12-25, an IMF team visited Spain to assess the strength of Spain’s financial sector. One of the main concerns, according to financial sources, are bad loans hidden through refinancing programs that could put lenders in a more susceptible position than previously thought.

“Lender forbearance – which the supervisory authorities have indicated they are monitoring closely – could not be fully incorporated into the stress tests due to lack of data, and this may have masked the extent of credit risk at some institutions,” the preliminary findings say.

One way some financial specialists believe that banks are “masking” their problems is by refinancing loans to companies and persons who will never be able to pay them off. By refinancing the loans and putting off payment, these loans don’t appear on any default list.

The Bank of Spain has taken measures so that lenders avoid such abuses in refinancing, but there is no data available, which raises the suspicions of the IMF and other international investors.

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