Let's say that you are prime minister of a basket-case European economy. You need to hold the begging bowl out in order that you can capture the flood of coins when wealthy institutions pull the lever on the fruit machine and hit the jackpot. Clonk, clonk, clonk. Loadsamoney. Ta very much. Your thanks and gratitude are moderated, however, by the knowledge that the jackpot comes with a caveat or two. It is one that makes you the victim of a bastardised principle of the caveat emptor. Into your empty bowl flow the coins of salvation (albeit only temporarily probably) but you've got something into the bargain that makes the salvation rather less of a bargain for the people you are allegedly governing. You have to raise taxes. Because you are told you have to.
The institutions want their pound of flesh in return for their largesse. They demand evidence that the coins won't just be frittered away, all put on a 2-1 favourite at Haydock which pulls up lame. They demand that you wear the sackcloth of austerity for the world to jeer at. You are willing to suffer this humiliation because you know, because the institutions must presumably have told you, that the raising of taxes will bring forth riches that will enable you to swap your sackcloth for an Armani suit.
Well, this is the theory. Unfortunately, it's not a very good theory, as it is a theory which rather ignores the practice. As prime minister of this basket-case economy (let's call it Portugal), you go along with the exigencies of the institutions, and you raise the level of value added tax. You manage to keep a rate of 6% for your hotels but your bars and restaurants must now apply 23%. You proudly announce that changes to this tax will indeed bring forth riches. An increase of revenues to the tune of 11.6%. You discover, to your horror and with egg firmly splattered on face, that you can't even now afford the sackcloth. Astonishingly, your revenues haven't met the 11.6% level, they haven't gone up at all. In fact, they have gone down by 1.1%. To make matters worse, although you have enjoyed an 11% increase in the number of tourists (thanks to not penalising the hotels), your tax rise has resulted in the loss of some 200,000 jobs in the general hostelry sector. See, told you it wasn't a very good theory.
Spain's tax rise of 2% in the tourism sector (hotels as well as bars and restaurants) means the rate differs to Portugal's but the result could be similar. Exceltur, the alliance for touristic excellence, believes that it will be: the loss of 2,000 million euros and 18,700 jobs. These losses, assuming they are accurate, would represent some achievement by the Spanish Government, even by its miserably low standards.
Why is the government messing around with IVA therefore? The simple answer is because it has been told that it has to; it's the pound of flesh, and one that leaves you asking whether any of the external bodies insisting on a rise in IVA have any more of an idea what they are doing than the Spanish Government, which hasn't got any.
You might think that I am just being rather unkind to poor old Mr. Rajoy and that Uncle Alfredo, had he become prime minister, wouldn't have done any better or anything different. Quite possibly not, but Rubalcaba hadn't promised before the election to cut the tourist rate of IVA and hadn't promised not to put income tax up. So, what did Rajoy do at the start of the year? Put income tax up, arguing this was a measure that would be less damaging to the economy than putting IVA up. Sorry, what was that? Less damaging than putting IVA up? Yes, I thought that was what he said, too. And Uncle Alfredo may have had someone in charge of economic affairs who didn't come out with pearls of wisdom similar to those of Luis de Guindos (Rajoy's man who seems to not have even managed to acquire his 101 Basic Economics). Shall I remind you of what he said in April? "Next year (2013) will be the time to increase the tax burden (IVA) on consumption, once the economy starts to grow again." Yes, he really did say this, a sentence in which everything was wrong.
Of course, one can argue, by way of a defence, that Rajoy and his unmerry men didn't appreciate the scale of the problem and the consequent demands to be placed upon them by Frau Merkel. One could argue this, but I would argue that they had a pretty shrewd idea, not that it prevented them coming out with the nonsense they did and continue to come out with. I give in evidence Rajoy's recent comparison with France and its rate of VAT, one that took no account of average salaries being double those of Spain. You don't whack IVA up in a country where people are paid a pittance as it is and expect to raise revenues and in a country where the avoidance of paying IVA is a national pastime.
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