VAT and all the rest

We are beginning to see that the bailout of the Spanish banks does have macroeconomic strings attached, though some of them would have been necessary anyway. On Monday Finance Minister Cristóbal Montoro admitted that the government is considering a rise in VAT, in line with the demands of Brussels and the IMF; also suggesting moves to increase the working hours of civil servants, so as to allow reductions in temporary staff. All this in compliance with two of the conditions attached to the 100-billion-euro EU bank bailout; and probably to be followed by new budget cutbacks, suppression of the tax deduction for housing and pension reductions. But the government is pretending that these decisions proceed from its own calculations. Hence Montoro excuses the hike in terms of the widespread evasion of the levy, as if this had not existed months ago, when he argued the other way.

Given the economic situation, the VAT hike is surely the lesser evil among possible moves. It will diminish consumption, and hinder reactivation; but the budget deviation makes compliance with the deficit objective impossible without raising taxes. Even though the Eurogroup has set back the three-percent deficit objective to 2014 and established the 2012 objective at 6.3 percent, the lack of control over spending and the slump in income oblige the government to resort to indirect taxes, including those which affect alcohol and tobacco. The precarious state of the economy complicates the possible options. The bank bailout, the difficulties of financing the debt in foreign markets, and the EU demands now make sovereign solvency a priority, at the expense of growth opportunities.

Ruinous improvisation

There has so far been little advance in deficit reduction. Perhaps a VAT hike will incentivate the creation of employment. But if VAT is chosen, one problem will be to exempt certain sectors of great weight in the economy. In any case, the VAT hike is proof of the inept political handling of the matter, as it further wrecks the already ruinous budget for 2012. The rise, which ought to have been forecast in the budget (which only came into legal effect last week) shows that the rise in income tax, as was said in these pages, was going to do little good.

It is not by chance that the government decided to accept a VAT hike just when the Eurogroup was preparing to discuss the memorandum on the Spanish bank bailout. Rather, it is another sign of the dangerous improvisation the Popular Party administration is treating us to on a regular basis.