The Spanish government is planning to bolster the country’s nascent economic recovery through tax cuts and a €6.3 billion stimulus package, in what is likely to be the last significant economic initiative before next year’s general election.
The measures – which include lowering the top corporate tax rate from 30 per cent to 25 per cent – were outlined by prime minister Mariano Rajoy to business leaders over the weekend. “The general idea is that taxes have to come down. The goal is to leave more disposable income in the hands of families . . . and above all else to boost employment,” he said.
Mr Rajoy added that the planned stimulus package, €2.7 billion of which would be financed by the private sector and €3.6 billion by the government, was designed to encourage investment in research and development and to help the “reindustrialisation” of the country. He said details would be revealed on Friday.
Deficit concerns
Mr Rajoy’s intervention comes less than a week after his ruling Popular Party suffered sharp losses in the European Parliament elections. Analysts argue that its lacklustre performance suggests the centre-right bloc has yet to persuade voters that Spain is in recovery, or that PP policies are working.
But the planned stimulus and tax cuts are also likely to fuel concerns over Spain’s wayward public deficit, which is among the highest in the European Union. According to the latest estimate by the European Commission, Spain will have a deficit of 5.6 per cent of gross domestic product this year, rising to 6.1 per cent in 2015.
Madrid has pledged to reduce its budget shortfall to less than 3 per cent of GDP by 2016 – a goal that the planned tax cuts and stimulus measures could put even further out of reach.
Spain’s overall debt burden, according to the commission, is on track to reach 100 per cent of GDP this year.
The country’s economy emerged from recession last year, and most forecasters believe it will experience growth of at least 1 per cent this year. At the same time, more than one in four workers are unemployed and surveys show that few Spaniards feel they are benefiting from the recent upswing.
Mr Rajoy knows that he now has relatively little time to push through deeper economic changes, with the second half of this year likely to be dominated by the political stand-off with the independence movement in Catalonia. Next year, he and his government face local, regional and general elections.
Spain’s leader said the corporate tax cut would be part of a broader overhaul of the country’s tax regime that is expected in June. At least some of that reduction, however, is likely to be offset through pruning the country’s notorious thicket of tax breaks, say officials. Under the current regime, which is especially generous to heavily-indebted firms, Spain’s big corporations typically pay an effective tax rate below 10 per cent.
Although details of Spain’s planned tax overhaul remain sketchy, the initiative has already emerged as an object of political controversy.
Groups such as the International Monetary Fund have urged Madrid to increase the amount of money it raises through value added tax – a move the government has ruled out repeatedly. – Copyright The Financial Times Limited 2014
