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Why Spain is the only country in Europe where taxes are rising during the pandemic

Even though Spain is forecast to have the deepest recession in the EU, Sánchez’s government is planning a tax hike for 2021, the polar opposite of what other nations in the bloc are choosing to do during the coronavirus crisis.

Why Spain is the only country in Europe where taxes are rising during the pandemic
Photos: AFP

As Spain and the rest of the world braces for the full economic impact of the coronavirus pandemic in 2021, the Iberian nation’s ruling socialist government has opted for increasing taxes as a way of filling its vastly depleted public coffers. 

A recent study by the International Monetary Fund revised earlier estimates and forecast a faster recovery than initially expected for many countries, but Spain was the only major European economy to be left off that list.

The IMF expects Spain will see a GDP drop of 14.1 percent by the end of 2020 (a figure which has been revised upwards twice already), 123 percent in public debt (€153.7 billion, or €118 billion more than in 2019) and an unemployment rate which will not recover to pre-Covid numbers until 2026.

Despite the increasingly dire projections, Spain’s left-wing coalition government formed by PSOE and Unidas Podemos will stick to their guns and push forward a fiscal hike that’s been cooking since the early days of the pandemic.

If approved, Spain’s Tax Agency will collect an extra €9 billion during the next two years.

“Spain needs a rigorous tax reform to close its structural fiscal deficit,” Ignacio Conde Ruiz, an economics professor at Madrid’s Complutense University, told The Local.

“Before the pandemic it was minus 4 percent of GDP and a reform would resolve the fiscal crisis that started in 2008.

“However, I think now is not the time to raise taxes.

“We’re in the middle of a pandemic, there is extreme uncertainty regarding the evolution of the pandemic in the coming quarters and there is no demand by the EU regarding the deficit (the safeguard clause was activated for 2020 and 2021).

“Therefore I cannot find any reasonable economic explanation that justifies the appropriateness of raising taxes at this time.

“Surely the explanation is more political than economic.”

What are the main tax hikes?

Until recently, some of the tax hikes most widely mentioned in the Spanish press are the VAT rise on single-use plastics as well as sugary drinks, which will add an extra €340 million to public coffers, and the so-called “tasa Google” aimed at getting digital giants Google, Amazon, Facebook and Apple to pay €800 million more in digital service taxes in Spain.

But while these measures might seem well-intended, many economists agree that raising taxes while corporate giants make losses could be damaging to employment and Spaniards’ pockets.

The Google tax alone is estimated to result in between €515 and €665 million in extra expenses for ordinary Spaniards due to the increase in digital service costs.

As for the sugar tax, a PwC study estimates it will result in the loss of 1,980 to 6,165 jobs in Spain.

But that’s far from all. On Tuesday October 27th PSOE and Unidas Podemos agreed to present in parliament a tax increase on high incomes and large companies by limiting exemptions for dividends and capital gains.

Tax deductions for private pension plans will also be reduced. Pedro Sánchez and Pablo Iglesias (pictured below) have also agreed to a one-point rise in the wealth tax for those with more than €10 million, although this is difficult to apply because it’s ultimately a regional decision.

The anti-fraud bill that’s attached to 2021’s fiscal reform is also expected to have an impact on normal earners, even though it’s primarily aimed at getting big multinationals to pay their dues.

There will be a limit on cash payments of €1,000, different valuations for calculating capital gains and potential personal income tax increases for properties that are gifted rather than inherited (a way used by many to sidestep high regional inheritance tax).

Self-employed workers in Spain will also soon have to start paying higher social security contributions.

How does this compare to the rest of Europe?

While Spain has opten for raising taxes in the midst of the coronavirus crisis, the rest of Europe has taken a different stance, aiming to incentivise business and spending during these unprecedented times rather than refill their public coffers.

Germany has lowered VAT from 19 to 5 percent until 2021, Greece has postponed tax payment until April 2021, France has committed to reducing taxes by €20 billion for the country’s manufacturing industry, the UK has dropped VAT on food products and Italy has postponed its own VAT hike and other taxes for businesses.

In Spain, although the ERTE furlough scheme has ensured that Spaniards’ prevented from working due to the pandemic get 70 percent of their earnings for now, no other major scheme has been rolled out to stimulate struggling businesses and workers.

Is this the right move by the Spanish government?

Spain’s Institute of Economic Studies (IEE) has opposed the government’s planned tax hikes, stating that Spain is among the countries that most hinder development and progress through its tax system.

In their study “Fiscal Competence 2020 – Why can't taxes be raised more in Spain?”, IEE writes that that an increase of 1 percent in labour costs translates to a reduction in employment of -0.37 percent.

IEE’s director Gregorio Izquierdo explains that based on this equation, if labour tax costs were reduced by 10 percent (social security contributions and personal income tax), 800,000 jobs could be created in Spain.

“It’s not the best time to go ahead with an increase in taxation”, stated IEE’s president Fernández de Mesa, adding that in Spain 40 percent of the labour costs “go to the public coffers”, either as withholding income tax or as social contributions, compared to the OECD’s average of 36 percent.

According to IEE, in the midst of the Covid-19 crisis in Spain, “the fiscal pressure in relation to GDP already increased by 6.5 percent compared to the previous year, when most of the countries are reducing taxes.”

Furthermore, Spaniards' fiscal effort – which takes into account the level of income – is almost 7 percent higher than the EU average, and the second highest of all developed countries after Italy.

“As a country we have to decide: do we dismantle part of the welfare state or increase revenue?” economist Ignacio Conde Ruiz argues.

Spain appears to be opting for the second option, for now.

Back in May, Spanish Finance Minister María Jesús Montero stated that there would not be “massive spending cuts or massive tax hikes.”

Her government now appears to have only stuck to part of that promise.

“Today we leave behind the period of neoliberalism and austerity,” Spanish deputy prime minister Pablo Iglesias said on Tuesday of the government’s proposed budget.

“Following the hard blow of the pandemic we could’ve fallen back on spending cuts, or pushed forward with energy.”

“These are progressive adjustments, indispensable for the modernisation of our country.”

 


  

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MONEY

Rampant branch closures and job cuts help Spain’s banks post huge earnings

Spain’s biggest banks this week reported huge profits in 2021 and cheered their return to recovery post-Covid, but ruthless cost-cutting in the form of thousands of layoffs, hundreds of branch closures and the removal of many ATMs have left customers in Spain suffering, in this latest example of ‘Capitalismo 2.0’. 

A man withdraws cash from a Santander branch in Madrid.
More than 3,500 Santander workers lost their jobs in Spain in 2021 and a further 2,000 more employees working for Santander across Europe were also laid off. Photo: PHILIPPE DESMAZES / AFP

Spanish banking giant Santander on Wednesday said it has bounced back from the pandemic as it returned to profit last year, beating analyst expectations and exceeding its pre-COVID earnings.

Likewise, Spain’s second-largest bank BBVA said on Thursday that it saw a strong rebound in 2021 following the Covid crisis, tripling its net profits thanks to a recovery in business activity.

It’s a similar story for Unicaja (€137 million profit in 2021), Caixabank (€5.2 billion profit thanks to merge with Bankia), Sabadell (€530 million profit last year), Abanca (€323 million profit) and all of Spain’s other main banks.

This may be promising news for Spain’s banking sector, but their profits have come at a cost for many of their employees and customers. 

In 2021, 19,000 bank employees lost their jobs, almost all through state-approved ERE layoffs, meant for companies struggling financially.

BBVA employees protest against layoffs in May 2021 in Madrid. Spain’s second-largest bank BBVA is looking to shed 3,800 jobs, affecting 16 percent of its staff, in a move denounced by unions as “scandalous”. (Photo by GABRIEL BOUYS / AFP)

Around 11 percent of bank branches in Spain have also been closed down in 2021 as part of Spanish banks’ attempts to cut costs, even though they’ve agreed to pay just under €5 billion in compensation.

Rampant branch closures have in turn resulted in 2,200 ATMs being removed since the Covid-19 pandemic began, even though the use of cajeros automáticos went up by 20 percent in 2021.

There are now 48,300 ATMs in Spain, levels not seen since 2001.

READ MORE:

Apart from losses caused by the coronavirus crisis, Spain’s financial institutions have justified the lay-offs, branch closures and ATM removals under the premise that there was already a shift to online banking taking place among customers. 

But the problem has been around for longer in a country with stark population differences between the cities and so-called ‘Empty Spain’, with rural communities and elderly people bearing the brunt of it. 

 

Caixabank laid off almost 6,500 workers in the first sixth months of 2021. Photo: ANDER GILLENEA/AFP

Just this month, a 78-year-old Valencian man has than collected 400,000+ signatures in an online petition calling for Spanish banks to offer face-to-face customer service that’s “humane” to elderly people, spurring the Bank of Spain and even Spain’s Prime Minister Pedro Sánchez to publicly say they would address the problem.

READ MORE: ‘I’m old, not stupid’ – How one Spanish senior is demanding face-to-face bank service

It’s worth noting that between 2008 and 2019, Spain had the highest number of branch closures and bank job cuts in Europe, with 48 percent of its branches shuttered compared with a bloc-wide average of 31 percent.

Below is more detailed information on how Santander and BBVA, Spain’s two biggest banks, have reported their huge profits in 2021.

Santander

Driven by a strong performance in the United States and Britain, the bank booked a net profit of €8.1 billion in 2021, close to a 12-year high. 

It was a huge improvement from 2020 when the pandemic hit and the bank suffered a net loss of €8.7 billion after it was forced to write down the value of several of its branches, particularly in the UK. It was also higher than 2019, when the bank posted a net profit of €6.5 billion.

Analysts from FactSet were expecting profits of €7.9 billion. 

“Our 2021 results demonstrate once again the value of our scale and presence across both developed and developing markets, with attributable profit 25 per cent higher than pre-COVID levels in 2019,” said chief executive Ana Botin in a statement.

Net banking income, the equivalent to turnover, also increased, reaching €33.4 billion, compared to €31.9 billion in 2020. This dynamic was made possible by a strong increase in customer numbers, with the group now counting almost 153 million customers worldwide. 

“We have added five million new customers in the last 12 months alone,” said Botin.

Santander performed particularly well in Europe and North America, with profits doubling in constant euros compared to 2020. In the UK, where Santander has a strong presence, current profit even “quadrupled” over the same period to €1.6 billion.

Last year’s net loss was the first in Banco Santander’s history, after having to revise downwards the value of several of its subsidiaries, notably in the UK, because of COVID.

The banking giant, which cut nearly 3,500 jobs at the end of 2020, in September announced an interim shareholder payout of €1.7 billion for its 2021 results. “In the coming weeks, we will announce additional compensation linked to the 2021 results,” it said.

BBVA

The group, which mainly operates in Spain but also in Latin America, Mexico and Turkey, posted profits of €4.65 billion ($5.25 billion), up from €1.3 billion a year earlier.

The result, which followed a solid fourth quarter with profits of €1.34 billion, was higher than expected, with FactSet analysts expecting a figure of €4.32 billion .

Excluding non-recurring items, such as the outcome of a restructuring plan launched last year, it generated profits of 5.07 billion euros in what was the highest figure “in 10 years”, the bank said in a statement.

In 2020, the Spanish bank saw its net profit tumble 63 percent as a result of asset depreciation and provisions taken against an increase in bad loans due to the economic fallout of the virus crisis.

“The economic recovery over the past year has brought with it a marked upturn in banking activity, mainly in the loan portfolio,” the bank explained, pointing to a reduction of the provisions put in place because of Covid.

In 2021, BBVA added a “record” 8.7 million new customers, largely due to the growth of its online activities. It now has 81.7 million customers worldwide.

The group’s net interest margins also rose 6.1 percent year-on-year to €14.7 billion, said the bank, which is undergoing a cost-cutting drive.

So far, it has axed 2,935 jobs and closed down 480 branches as the banking sector undergoes increasing digitalisation and fewer and fewer transactions are carried out over the counter.

At the end of 2020, BBVA sold its US unit to PNC Financial Services for nearly 10 billion euros and decided to reinvest some of the funds in the Turkish market.

In November, it launched a bid to take full control of its Turkish lending subsidiary Garanti, offering €2.25 billion ($2.6 billion) to buy the 50.15 percent stake it does not yet own.

The deal should be finalised in the first quarter of 2022.

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