Thursday, July 19, 2012

Spanish families squeezed for €415 more tax

€415.  That's the estimated annual cost per household of the increase in IVA recently announced by the Spanish government to try and close the fiscal deficit.

The general rate applicable to anything sold in the country apart from reduced or VAT-free categories (see below) is up to 21% from the current 18%.

Beneath this headline-grabbing rise is a second increase to the "reduced" rate category of taxable goods and services which goes up from 8% to 10%.  This 25% hike in tax is important as it is the rate applicable to such things as some food and non-alcoholic drink, health products, transport, entertainment etc that ordinary people consume every day.  So it will really make everyone feel poorer and reduce spending power right through society.

This reduced rate also applies to new build construction so a new house will cost an extra 10% in tax on top.  This does not apply until 2013 as the previous government brought in a temporary VAT cut to 4% for new homes which expires this year.

And that's just IVA of course.  Spending cuts have targeted unemployment benefits and the pay of public sector workers.  The latter seems bound to lead to strikes.

Another move, specifically at the request of Spain's new fiscal masters in Brussels apparently, has been to abolish the offset of housing costs versus tax except for buyers of property post-2006.

Economists foresee the already shrinking economy declining further as a result of the new hits to demand, with forecasts of recession through to 2014.  No surprise there but there is a surprise, to me at any rate, in the size of the expected contraction.  For example the IMF is talking about a 1.5% fall in GDP this year and actually growth of 0.6% next year.  Hardly Greek style-collapse but the IMF have been wrong before.

If they are right and Spain can muddle through with the economy merely stagnant while these deficit measures take effect and the banks are sorted out then perhaps a full blown bail-out or euro exit can be averted.

I have my doubts.  Looking around the country it seems like there is an air of desperation and bewilderment among the population even before these latest tax rises and spending cuts.  Big price rises across the board, wage and benefit cuts, higher income tax, regional spending cuts etc will surely crucify what is left of economic confidence.  And I wouldn't rule out the Spanish people rising up and demanding that some of the measures are reversed as the pain becomes too great to bear.  We'll see.

From our website:  Allowable business expenses in Spain

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