Spain raises VAT to cut budget deficit and fight recession

MADRID
SPAIN will raise value-added tax by two percentage points to 18 percent and will cut the budget deficit by slightly more than initially forecast next year, the government said yesterday, in moves aimed at guaranteeing the trust of debt markets in its long-term solvency.

Announcing the 2010 budget bill, which now has to be approved by parliament, Economy Minister Elena Salgado said the government would aim to cut the central government deficit to 5.4 percent of gross domestic product in 2010.

Including the social security system and local governments, the total state sector deficit should be 8.1 percent of GDP.
This compared with an earlier government forecast of 8.4 percent, which had raised doubts about the government's willingness to take measures to bring the shortfall back to the 3 percent maximum stipulated by Europe's Stability Pact.

The government will also raise capital gains tax on profits of more than 6'000 euros to 21 percent from 18 percent, Salgado said, adding that tax increases should raise about 10 billion euros or 1 percent of GDP. “Those who have the most should make the biggest contribution,” Salgado told a news conference.
The 2009 budget deficit is expected by analysts to approach 10 percent of GDP, partly due to a massive state spending programme at a time when the government expects the economy to contract by 3.6 percent this year.

The 2010 budget will also eliminate a 400 euro tax rebate and cut spending by 3.9 percent in like-for-like terms from 2009, Salgado said.
The Socialist government can now expect tough negotiations in order to persuade parliament to approve the budget.