Spain Brings Forward Tax Cuts To Bolster Economy

by Ulrika Lomas, Tax-News.com, Brussels

01 October 2001

Last week Spanish treasury minister Cristobal Montoro presented the 2002 state and social security budgets to parliament. Spain is planning for a balanced budget in 2002 on the assumption of a 2.9% rise in GDP. But these targets could be threatened by the slowdown that seems likely to follow the terracts in America. Mr Montoro therefore used his budget speech to announce that the government will bring forward some of the planned fiscal reforms which formed part of his party's election manifesto.

The budgets are the first to have been produced solely in euros, and comparison with previous figures is made near-impossible since the budgets incorporate the new system for financing regional governments, which makes the regions responsible for their own deficits. The budget includes an 8.9% rise in national insurance contributions and the transfer of Pta570bn (0.5 per cent of GDP) from the social security surplus at the end of 2002 in order to avoid a general government deficit. Now Mr Montoro says that the government will bring forward reforms to the corporate tax regime in order to stimulate economic activity. The reforms, including tax cuts, will be particularly directed at the tourist sector, including hotels and airlines, where the effects of the slowdown are likely to be especially marked.

The budget seems to be ambitious at a time when the IMF is reducing its growth forecasts for Spain. It expects growth of 2.7 per cent for 2001 and does not believe that the country's GDP will rise by more than 2.8 per cent in 2002. Despite the IMF's caution, Mr Montoro expects a rebound of economic activity towards the end of 2002. He is confident that his budgetary targets will be met and that Spanish economic growth will continue to exceed that of the EU.

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