This Week's Focus: The duties of Montoro

This Week's Focus: The duties of Montoro


The Spanish government has to reduce the deficit by about 7.7 billion euros as demand by the European Commission. This adjustment must necessarily come from a reduction in public spending or a rise in tax revenues, that is, from tax collection.

Little to cut...

Following the invaluable assistance of the European Central Bank in reducing the financial cost of Public Debt, coupled with the increase in outstanding debt to levels unprecedented in recent history, the additional cut in financial expenses in public expenditure items does not seem Feasible (see Spanish public debt exceeds 100% of GDP).

Of the other expenditure chapters, both public benefits and social spending do not have much room for adjustment, due to the demographic pressure on the public pensions as we have already discussed. Can the pension fund be replenished?

Regarding defense spending, the long-term contracts created during the economic boom stage with Carme Chacón as the minister of the industry do not give scope for action in the short term.

Therefore, the priority of the Ministry of Finance is focused on how to increase revenue without derailing the still weak economic recovery of Spain.

But where to collect?

The pillars of the tax collection in Spain are the Personal Income Tax (IRPF) and the Value Added Tax (VAT). Both taxes accounted for 70.6% of tax revenues in 2015 and 30.4% of revenue items in the State Budget.

The Government has advanced that it does not intend to increase the Personal Income Tax (IRPF) and on many occasions has stated against increasing VAT rates. However, he is confident that the economic recovery will lead to an increase in tax revenues due to the increase in family income and household consumption, which are the tax bases on which income tax and VAT are levied.

As for personal income tax, the surprising fact is that even during the crisis, the tax for this tax suffered large declines, but maintained an incremental trend, regardless of the evolution of family income. In 2010, in the middle of the economic crisis, the collection was similar to that of 2007, still in full boom.

In VAT, we also observe a similar pattern. Despite the sharp drop in consumption associated with the financial crisis, VAT collection did not suffer as much as its base and fell by 12% until 2009. Since 2010 it has continued to increase, being 29% higher than in the worst year of The crisis, that is to say since 2009.

Therefore, the decision not to increase income tax and VAT is simply that the tax burden on families, which grew during the period of financial crisis, can hardly be increased after the hard part of the fiscal adjustment has fallen on them. In this context, increased pressure may lead to greater social discontent.

The subsidized increase in excise taxes (IIEE) also has its grace, since the IIEEs are the poor relative of our tax revenues. Although taxing different things, the bulk of this tax is collected on the consumption of tobacco and hydrocarbons, ie gasoline and diesel.

In fact, these are taxes whose collection is strongly cyclical, given the high weight of hydrocarbons and their correlation with the evolution of the economy. Tobacco, due to social changes and its lower acceptance as a cause of illness, has a decreasing consumption trend.

Therefore, by much increase of IIEE, there is not going to solve the problem of public deficit.

Finally, we have the corporate income tax (IS). This tax has a very high relation with the economic cycle, since it taxes the profits of the companies. In addition, it allows the losses incurred in certain years to be offset against the profits that are obtained in subsequent years, so that the obtaining of benefits does not necessarily imply tax for them.

For this reason, until 2002 the gap between benefits and taxable base was little relevant. The fiscal changes introduced since 2003 began to widen this gap and, as a result of the crisis, has been maintained and expanded.

In 2015, the profits of the companies surpassed those of 2007, previous cycle peak, but the collection by IS is barely half that then. It is expected that the progressive absorption of negative tax bases will have its effect increasing the bases and, in turn, the collection.

The evidence indicates that the IS itself is not equitable. Small and medium-sized enterprises often bear a real tax rate much higher than that of large ones. Thus, companies such as Telefónica paid an effective rate in the IS of only between 4% (2015) and 8% (2014) according to their financial information.

Rely on forecasts

On the other hand, increasing the tax burden on business can have a negative impact on job creation and economic growth, although it seems that the tax burden is not evenly distributed.

Tax competition between states, even within the European Union itself, makes it even more difficult to increase the control of corporate profits. The elimination of certain bonuses and deductions can have a more accurate effect in aligning the expected taxation with the effective one.

In any case, it seems that there is not much where the Minister of Finance can fish. The increase in payments to account agreed in 2016 has a temporary effect, since the collection proceeds and reduces the deficit by cash criterion, but does not solve the problem of insufficient income over time.

Let us hope that Minister Guindos' economic growth forecasts are correct and the impact on the IS in 2016 and 2017 will help reduce the deficit.