Finance Minister Luis de Guindos, Deputy Prime Minister Soraya Sáenz de Santamaría and Budget Minister Cristóbal Montoro in the press conference on Friday. (REUTERS)
When Spain’s Budget Minister Cristóbal Montoro was asked in a press conference on Friday which products and services that will be affected by the new tax increases, he answered, “it will be easier to tell you the ones that will not change.”
He was right. Almost all products and services will be affected by the new tax schemes that will enter into effect on September 1.
For many Spaniards, who already face difficult economic times –the country has Europe’s highest unemployment rate at about 25 percent and household incomes have dropped dramatically over the last years – the raised taxes on consumption will put even further strains on the families’ economies.
Apart from increased VAT, the government also decided, for instance, to reduce unemployment benefits, eliminate some privileges for public sector employees and increase income taxes for self-employed workers. The reforms were met by street protests over the weekend and on Monday, and the trade unions have announced a demonstration on Thursday.
Few sectors spared from tax hikes
The government took the formal decision on Saturday to raise value-added tax rates. The regular rate of 18 percent will be increased to 21 percent; the reduced rate of 8 percent will be increased to 10 percent; while the ‘super-reduced’ rate of 4 percent will remain unchanged.
Apart from increasing the rates, however, a large majority of products and services will be moved from the low rates to the highest, which means taxes on these products will jump from 8 to 21 percent.
The only sectors that will keep the reduced rate - which will increase from 8 to 10 percent - are transport, food and the tourist sector, where VAT on, for instance, hotel costs remain reduced.
Several leaders in the tourist sector, however, strongly criticized that it will be affected by the increase of 2 percent, which they believe will have a very negative influence on one of the country’s most important sectors. Tourism generates over 10 percent of gross domestic product and provides about 11 percent of the country’s employment.
Increased VAT on culture and sports
Among the sectors that will be most hard hit by the new taxes are all of those related to culture and sports, including entries to cinemas, theatres, museums, sports events and circuses, where taxes will be increased by 13 percent, from 8 to 21 percent.
Many details on the drastic changes were not specified during the press conference on Friday held jointly by Montoro, Deputy Prime Minister Soraya Sáenz de Santamaría and Finance Minister Luis de Guindos, in which they announced a large number of measures aimed at reducing the country’s high deficit.
When asked which sectors will be affected by the new tax rates, Montoro gave some examples including entries to theatres and circuses, funeral services and aesthetic care, such as hair dressers.
The list of services and products that will be affected is much longer, however. Some examples include: glasses; contact lenses; health products; cleaning services for public roads, parks and gardens; health services and dental care; entries to exhibits, museums, amusement parks, concerts and zoos; library services; commercial fairs; supplying and receiving radio and digital TV services; sales and installation of kitchen and bathroom furniture; and imports of arts and antiques.
Apart from these tax increases, tax deductions on real estate investments will be withdrawn from January 1 and VAT at the lowest rate of 4 percent for purchases of new housing will be raised to 10 percent.
Reforms will bring in €56.4bn
As a whole, the reforms announced on Friday aim at bringing in €56.4bn –out of which 40 percent will come from the increased VAT– to the state’s accounts, a fact which was also excluded both from the press conference and the press release to Spanish media.
Instead, this number was disclosed in a communiqué only released in English, which was widely criticized by several Spanish media outlets, including El Confidencial, who interpreted it as intended to inform international investors rather than the Spanish people of the details of the reform package.
On Wednesday, when Prime Minister Mariano Rajoy presented the new austerity measures to the Congress of Deputies, he said that the government counts on saving €65bn in total through these reforms, from which it may be deduced that they intend to introduce other measures adding up to about €8.5bn.
Montoro said that the government has increased VAT because “it has to do it” given the circumstances and following the recommendation from the European Union and because of the priority to reduce the deficit.
The governing Popular party has thus had to make a shift away from its campaign promise to reduce taxes.
This article was translated and edited by Stina Lunden.
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