The European Commission today called on Spain to restrict the application of the reduced VAT rate and raise fuel taxes to reduce the deficit, and continue reforms in the labor and pensions, delaying the effective retirement age. These requests collide with the ideas defended by the Spanish Government no further adjustment and lower taxes in 2014.Economic Stupidity at its Finest
Brussels also calls on the Government to implement a stricter budgetary stability law to the autonomous regions in breach of their deficit targets and accelerate the implementation of budgetary control office.
Brussels admits that the increase in VAT which applies since last September (from 18% to 21% and the basic rate from 8% to 10% reduced rate) is a "progress" to improve the effectiveness of the Spanish tax system. "However, there is scope to limit the application of different VAT rates low and to increase environmental taxes, especially fuels," says the report.
For those not familiar with the VAT system in Europe, there are varying tax rates on numerous categories of products and services.
The lowest VAT rate in Spain went from 8% to 10% and Brussels wants Spain to limit the number of items that get the lowest rate. Brussels calls the hike in the minimum VAT to 10% and the top VAT to 21% "progress".
Tax hikes in the middle of a depression is "economic stupidity", not progress.
Monitoring Spain's Deficit
Not counting bank bailouts, El Economista reports Spain ended 2012 with a deficit at 6.74%.
The Minister of Finance and Public Administration, Cristobal Montoro, today confirmed that the total government deficit ended the year 2012 on the 6.74% of gross domestic product (GDP), as reported yesterday the Prime Minister Mariano Rajoy. Also reported that the deficit of the regions was 1.73%, two-tenths above the target.Battle Over Adjustments
The government closed last year with a deficit of 70.822 million euros, equivalent to 6.74% of GDP, .44 percentage points above the target agreed with Brussels (6.3%). The deficit rises to 9.99% when taking into account the banking aid, which added 3.25 percentage points. This figure is higher than that recorded in 2011, from 9.44% of GDP.
The hole in the budget of the regions was 1.73%, when the target was 1.5%, while the local government hole was 0.2%, better than the 0.3% that had been planned.
No More Adjustments
The finance minister has said he will not take further tightening measures in 2013 because it is not necessary. "There will be no need for further action," said Montoro.
The two biggest problems in Spain are government spending and lack of labor reforms, so the solution cannot possibly be higher taxes. Yet, higher taxes is exactly what Brussels demands, smack in the midst of an economic depression, and smack in the face of a "no more adjustments" statement from Spain's finance minister.
Those tax hikes are guaranteed to be counterproductive. One can also expect still more bank bailouts. Thus, a rational-thinking person expects another huge budget deficit miss by Spain in 2013 and beyond.
For more on the hopelessness in Spain (and the eurozone in aggregate), please see
- Michael Pettis on Misguided European Optimism
- Car Sales Plunge 10% in Germany, 12% in France, 17% in Italy; US Plunge Coming Up
The unfortunate thing in this mess is having to listen to Keynesian clowns shout "I told you so" regarding "austerity" when not a single Austrian economist anywhere would be supportive of these tax hikes (and it is tax hikes and lack of labor reforms, not "austerity" that is wrecking Europe).
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
