OECD Recommends Switch In Spanish Tax Burden

by Ulrika Lomas, Tax-News.com, Hong Kong

23 December 2010

The Organisation for Economic Cooperation and Development (OECD), in its latest “Economic Survey of Spain”, has recommended that Spain should implement major reforms to improve government finances and create jobs, including the reform of its pension system and a switch in the tax burden from labour to consumption and property taxes.

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, it adds, 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 says 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, once sufficient fiscal consolidation has been achieved, the tax system could be reformed to be more growth friendly by switching the tax burden from labour to consumption and property taxes.

In addition, to contain significant ageing costs, the OECD says that a reform of old-age pensions, including an increase in the legal retirement age and restrictions to subsidised early withdrawal from the labour market, is urgent so as to allow for gradual implementation.

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