Brussels Calls for More VAT Increases and Continued Reforms

Earlier this week the European Commission called on Spain to limit the application of the reduced VAT rate and raise fuel taxes in order to reduce the deficit, in addition to continuing with the labour and pensions reforms, delaying the effective retirement age. These demands collide with the ideas defended previously by the Spanish Government, of not carrying out any further adjustments and of lowering taxes in 2014.

Brussels also called on the Spanish Government to apply more strictly the budgetary stability law on the autonomous regions in breach of their deficit targets, and accelerate the implementation of the office of budgetary control.

These recommendations appear in the second evaluation report of the bank bailout for Spain, drawn up by the European Commission, in collaboration with the European Central Bank. The report contains the findings of the inspectors who travelled to Madrid from 28th January to 1st February.

This report is in direct contrast with the European Commission’s recent message on the budgetary efforts required by Spain, when the Head of Economic Affairs, Olli Rehn, demonstrated his willingness to relax the pace of deficit reduction for the country if the data confirms that Mariano Rajoy’s Government fulfilled the structural adjustment demanded in 2012.

Brussels admits that the increase in VAT applied since last September (from 18% to 21% for the basic rate and from 8% to 10% for the reduced rate) is “progress” towards improving the effectiveness of the Spanish tax system. “However, there is scope to limit the application of different low VAT rates and to increase environmental taxes, especially on fuels,” states the report.

“The recurring deficits in the social security system should also be checked,” says Brussels. In 2012, the deficit amounted to 1% of GDP, instead of the balance that the Government had previously estimated. “Plans to introduce a sustainability factor in the pension system and to increase the effective retirement age would be important steps in this direction, but have yet to be adopted,” said the Commission.

The report does note that the labour reform approved by the Spanish Government last year “may be starting to have an impact”, as can be seen in the moderation of wages and increased layoffs. “The reform has the potential to strengthen the link between wages, the economic cycle and the position of the companies,” says the Commission.

However, Brussels said: “the duality in the labour market remains unchanged” and that “the severity of the labour market situation requires monitoring and continuous review of the impact of the reform.” The Spanish authorities have agreed to carry out a review during the first quarter of the year and the Commission has asked them to focus on “the impact on wage dynamics, labour market segmentation and employability”.

In addition, El Economista reported that the European Commission have called for the Government to increase spending on education, labour market integration and retraining, to modernise public employment services and improve national and regional coordination.