Government considering hike in reduced rate of VAT

Government sources said Monday that the Finance Ministry is studying areas where it can apply the value-added tax (VAT) hikes that have been recommended by Brussels.

Spaniards could soon be paying up to 18 percent on certain goods and services that currently fall under a reduced and super-reduced rate.

The current reduced eight-percent rate is applied to the majority of food and sanitary products, ground transport, and concert, movie and museum tickets. The super-reduced four-percent rate is for basic foodstuffs, such as milk, fruit and vegetables.

The European Commission and the IMF have recommended that Spain adjust VAT on certain products and services. Prime Minister Mariano Rajoy has been insisting that he won’t raise VAT from its current 18-percent rate.

On Monday, Economy Minister Luis de Guindos sent a formal letter to the Eurogroup to request funds to recapitalize Spain’s banks. The final amount of the rescue package will be determined on July 9 after Spanish officials meet with EU authorities to discuss the interest on the loan and the terms. Two independent audits released last Thursday show that Spain needs up to 62 billion euros to clean up its banks. Eurogroup finance ministers have already offered 100 billion.

EC vice president Olli Rehn said that Brussels would “closely and regularly review” Spain’s commitments to keeping its deficit down and implementing reforms.

The markets reacted badly to the lack of detail of the rescue package, with doubts over Spain’s solvency remaining. The blue-chip Ibex 35 dropped 3.67 percent, closing at 6,624 points. The risk premium on Spain’s 10-year bond rose sharply to 518.7 basis points over the benchmark bund.