Spain?s Latest Austerity Measures Are Now In Force ? But Could We Be Facing More Tax Rises?

11.01.11

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The austerity budget for 2011 was passed by Spain?s parliament just before Christmas by the thin margin of 177 votes against 171. Although it is very unpopular it is necessary both to improve the

The austerity budget for 2011 was passed by Spain?s parliament just before Christmas by the thin margin of 177 votes against 171. Although it is very unpopular it is necessary both to improve the public finances and to restore market confidence in the country.

The cuts included in the budget include a 7.9% cut in state-level spending and a 16% cut in departmental spending. The budget also introduces tax increases on those earning over ?120,000 per year.

In 2009 Spain?s deficit was 11.1% of gross domestic product (GDP) and it is estimated to be 9.3% for 2010. The new budget aims to reduce it to 6% this year and then to the EU limit of 3% by 2013.

Finance minister Elena Salgado conceded that the measures would make 2011 a difficult year, but said that the fiscal consolidation and structural reform was ?the cornerstone of a return of growth in the medium term?.

Spain has also been under increased international pressure since the Greek and Irish bail outs, and has been facing higher borrowing costs. Prime minister Jose Luis Rodriguez Zapatero needed to show that Spain is serious about taking control of its finances. Zapatero insists that Spain will not need help and his government released data to show that central government?s deficit to end of November was down 46% on the same period the year before. Financial markets should welcome the budget as it removes some uncertainty for 2011 and should help Spain ? the fourth biggest member of the Eurozone ? avoid a bail-out.

Just the week before the budget was passed, ratings agency Moody?s said that it had put Spain?s sovereign debt rating on review because of slow economic growth. Moody?s has already cut the rating in September. It also warned that it may have to downgrade Spain?s banks since their capitalisation, profitability and access to market funding remain weak.

The same week the budget was passed the Organisation for Economic Co-Operation and Development (OECD) released its Economic Survey of Spain. The report suggests that in order for the government to stick to its deficit reduction plan and meet its growth forecasts, it may need to implement further tax increases.

Spain?s growth forecasts are higher than the OECD?s. The government is expecting growth of 1.3% in 2011 and 2.5% in 2012, while the OECD forecasts 0.9% and 1.8% in 2011 and 2012 respectively.

The OECD points out that, while the depth of the Spanish recession in terms of real gross domestic product has been similar to other advanced OECD economies, it has led to a much larger increase in unemployment and a sharper deterioration in government finances, both to a large extent structural. In Spain the global crisis has been compounded by an unsustainable domestic demand boom driven by residential and business investment, resulting in rising private sector debt.

The report advises that the country?s large structural fiscal shortfall needs to be closed, and that more than half of the deterioration of the government balance is likely to be structural. The government?s consolidation package is considered to make substantial progress towards sustainability (although specific measures need to be spelled out), but the government should be ready to raise taxes further if needed, given the risks over the sustainability of public sector wage cuts, optimistic growth targets and a lack of specified measures to restrain public expenditure after 2011.

?If further consolidation measures are needed to meet the fiscal targets, tax increases could also complement expenditure cuts as the overall tax burden in Spain remains relatively low in comparison to other high-income European economies. Well-selected tax increases could also have a relatively more benign impact on activity than some expenditure cuts.?

The OECD suggests that VAT should be charged on more items and that more indirect taxes, such as an environmental levy on water usage, could be introduced.

The report also says that Spain needs an ?urgent? overhaul of its pension system to contain significant ageing costs. This should include an increase in the legal retirement age and restrictions to subsidised early withdrawal from the labour market.

The government is due to present a pension reform at the end of January.

At the beginning of 2010 Spanish tax residents saw the tax they pay on their savings income (including interest earnings, investment income and capital gains), increase from 18% to 19%. If your total savings/investment income or gains exceeds ?6,000 in a year, then the rate was increased to 21% on the excess.

Then in July the cost of living increased thanks to higher VAT rates.

From 1st January this year the top rate of income tax levied by the state has jumped 2% from 43%, with the introduction of two additional tax bands from 2011. Annual income from ?120,000 to ?175,000 is now taxed at 44% and income over ?175,000 at 45%. In certain autonomous regions like Andalucia and Catalu? the top rate of tax is even higher.

If the OECD warning is anything to go by Spanish residents may have to face more tax rises in future, whether directly or indirectly.

We cannot do much about avoiding indirect taxes such as VAT rises, so they would make it even more important that we lower taxes on our savings and investments where we can. There are legitimate arrangements available in Spain that already help many Spanish residents lower tax on their investment income and capital growth.

If you would like peace of mind that you are not paying more tax than you need to, speak to a tax and wealth manager such as Blevins Franks to find out what opportunities are available to you and how much tax you can save.

By Bill Blevins, Managing Director, Blevins Franks

23rd December 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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