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

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

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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