Fiscal reforms and hikes on highest rates of income tax ‘inevitable,’ says Spanish prime minister

Spanish Prime Minister Pedro Sánchez said on Thursday that the country’s tax system needs to be reformed so that those who are in the highest income tax (IRPF) bracket, as well as large companies, pay larger contributions. In an interview with Spanish television channel La Sexta, the Socialist Party (PSOE) leader said that a tax hike on large companies was “inevitable,” given that they pay less than a 10% rate.

The comments came as Spain struggles with the financial fallout of the coronavirus crisis, which has devastated the tourism industry, and led to the largest first quarterly drop in gross domestic product (GDP) in nearly a century.

The prime minister announced an additional €50 billion in loans for small businesses and self-employed workers

In a bid to address this crisis and create a fairer tax system, Sánchez also raised the possibility of increasing value-added tax (VAT), as recommended by the Bank of Spain in its Annual Report.

According to Sánchez, Spain must close its fiscal gap with Europe if it is to strengthen the country’s welfare system in areas such as public healthcare. In Spain, the tax burden – the total tax revenue as a percentage of GDP – is 39%. This is six points below the European average, which translates to €80 billion in taxes a year.

Sánchez said that Spain will make adjustments in the “short term,” once the coronavirus recovery effort is underway, in accordance with the recommendations from EU institutions and the International Monetary Fund (IMF). The prime minister also announced on Thursday that an additional €50 billion in loans will be made available to small businesses and self-employed workers through the state-owned lender Instituto de Crédito Español (ICO).

The government is also focused on the European Commission’s €750 billion recovery package which must be approved by the 27-member bloc. Sánchez said he will meet with the leaders of Sweden and the Netherlands to make Spain’s position known. “Spain will contribute 9% to this fund, much more than the 6% that the Netherlands is contributing,” he said.

According to Sánchez, Spain must close its fiscal gap with Europe if it is to strengthen the country’s welfare system

The Netherlands is one of the staunchest critics of the plan, forming part of the so-called “frugal four” with Austria, Denmark and Sweden, which have blocked previous attempts to approve the aid package. If the coronavirus recovery plan is approved, Spain may receive a total of €140 billion to help shore up its economy, which is expected to contract by up to 13%, according to the Bank of Spain.

Sánchez also said the government was focused on passing a new budget by the end of the year. The prime minister leads a minority government led by his party and backed by junior partner Unidas Podemos, meaning he needs the support of other groups to pass legislation such as the budget. In 2019, Sánchez failed to secure enough votes to pass his budget plans, which led to a snap general election in April, and a repeat vote in November. The prime minister said that he hopes to secure a wide margin of votes to approve the 2021 plans: “Unity must be the obligation for the government and the opposition,” he told La Sexta.

On the question of Unidas Podemos, Sánchez said he had “no doubt” the party was a “loyal” partner, and insisted that his government would see out its four-year term, arguing “the coalition is stronger than ever.”

English version by Melissa Kitson.