PUBLIC FINANCES

Government pledges no new major tax hikes until 2015

Finance Minister Montoro says Madrid to renegotiate deficit targets with the regions if Brussels cuts Spain more slack

Finance Minister Cristóbal Montoro said Wednesday that the government rules out any further increases in “main taxes” in what is left of its mandate, and pledged “selective” cuts in some levies. General elections are due to be held in Spain by November of 2015.

“In the rest of the legislature, and there is a long way to go, there is no intention on the part of the government to raise any of the main taxes in the Spanish economy, quite the opposite,” Montoro told Congress.

The European Commission last month estimated that Spain’s public deficit would rise again in 2014 to 7.2 percent of GDP from a forecast 6.7 percent this year in the absence of further fiscal measures and with those introduced in 2012 due to expire. In its second review of Spain’s compliance with the conditions of the European bailout for its banks, Brussels dropped a strong hint of the desirability of hiking value-added tax once more to bring in greater revenues. "The tax-to-GDP ratio as well as VAT revenue and revenue from environmental taxes in Spain are among the lowest in the EU," the EC said in the review.

Brussels is expected to give Spain more leeway in bringing its deficit back within the European Union ceiling of three percent of GDP, but it is uncertain whether it will grant a one- or two-year extension and what strings might be attached to the concession. The shortfall last year was 6.7 percent of GDP, down from 8.9 percent in 2011.

If Brussels does cut Spain some slack, Montoro said the central government would negotiate a new deficit-reduction schedule for the regions, which are being asked to reduce their combined shortfall for this year to 0.7 percent of GDP. Their deficit in 2012 was 1.7 percent, 0.2 points above target.

Despite the ruling Popular Party’s pledge during its 2011 campaign not to raise taxes, it introduced a series of hikes in corporate and personal income tax, as well as value-added tax. Speaking in Congress, Montoro said the increases were the “least of all evils” given the need to reduce the deficit.

Including the bailout received from its European partners, the public deficit last year was close to 10 percent of GDP. The 6.7-percent figure was also achieved by delaying the return of funds to taxpayers who had paid more tax than was due.

Despite that, Montoro lauded the government’s efforts in reducing the structural deficit, the shortfall not accounted for by the economic cycle. “Could you imagine what would be happening in March 2013 if Spain had not complied with the deficit target agreed with Brussels,” Montoro said. “We would have been assailed by the markets without the possibility of placing our public debt.”