The Tax Calamity About To Arrive In Spain

There you are, standing on the platform waiting for the train of recovery to arrive and whisk you off to the promised land of growth, and what happens? Some idiot goes and derails the train.

Is Señor Luis de Guindos an idiot? It is a perfectly reasonable question because, and I quote from the news feeds, "next year will be time to increase the tax burden on consumption, once the economy starts to grow again". There is an awful lot wrong with this statement. In fact, there isn't anything that is right about it. "Once the economy starts to grow again?" When is this meant to happen?

Who is Señor de Guindos? It is another perfectly reasonable question, as no one seems to have the faintest idea who is in fact running Spain's economy. Rajoy can be discounted, as one fancies he is being sidelined by the rest of his party as he has shown a total lack of leadership. It could be the iron lady-in-waiting, the deeply worrying María Soraya Sáenz de Santamaria Antón (to name but a few), ostensibly the vice-president (or deputy prime minister, to be more accurate). Or it could be Cristóbal Montoro Romero, the treasury minister. Him, do you think? Who knows?

De Guindos is the minister for economic affairs and competitiveness, and he and Montoro have managed in the recent past to utter totally conflicting statements. Let's wait and see. Montoro will probably announce that there is to be a tax reduction rather than an increase.

For now though, we have to take de Guindos' word for what is going to happen in 2013. And this, bearing in mind it is coming from someone supposedly responsible for competitiveness, will entail an increase in IVA, or value added tax as the British would know it. He hasn't said by how much, but rise there will be.

Let's consider de Guindos' statement again. There is no growth at present. Indeed, Spain has fallen back into recession. Were there to be any growth, and that's a big "were", it would be negligible, but clearly de Guindos believes it's going to be of such magnitude that the time will be right to up IVA. Again. It went up last year by two percentage points.

It's all right of course, because the IMF says that this is the best strategy. Best strategy for what exactly? You don't need to have studied economics to know that increasing value added tax is a surefire way of stunting growth. Put it up and you cut consumption, which cuts growth. Simples. Moreover, a rise in IVA adds to inflation, thus penalising doubly those who can least afford price increases - the poorer sectors of society.

Increasing indirect taxation has not exactly been an overwhelming success elsewhere. Britain, for example. Double-dip recession has at least been contributed to by the rise in VAT. It's not as though Cameron had not expressed his doubts about VAT previously. "Regressive," he had called it. "Hits the poorest the hardest." So what did Osborne do?

It is regressive in two ways. One that it causes the economy to regress, the other that is the opposite of progressive, as in progressive taxation, otherwise known as income tax and variable rates depending upon income and means.

The apologists, and no doubt the Spanish Government, will argue that something has to be done about getting the Spanish economy out of its coffin with the lid on the point of closing and about signalling intentions to markets and the European Union which have all but given up on Rajoy. But signalling intention to do something in 2013 isn't going to stop the immediate problems Spain faces and the likelihood that future bond sales might not work.

There is a further problem. And that is the fact that the Spanish as a people spend their leisure time figuring out ways of not paying IVA. Put it up further and they'll be devoting even more of this leisure time.

And announcing an intention to increase IVA is going to unleash all manner of vested interests demanding that it is not increased in their sector. The hotels and the tourism industry, for example. They had hoped for a cut to what is in effect a tourist rate of IVA (8%) which wasn't forthcoming. They keep banging on about the necessity of a reduction for the tourism sector and the noise will get louder now.

Were, though, there to be special concessions for tourism (and in my view there most certainly shouldn't be), these would be an even more bitter pill for the general public to take. It would be wrong and would represent a caving-in to a powerful lobby. But increasing IVA at all would be wrong. It would be calamitous.


Any comments to andrew@thealcudiaguide.com please.