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Spanish Lawmakers Pass 2013 Austerity Budget

by Ulrika Lomas,, Brussels

26 December 2012

The Spanish parliament has formally adopted the government’s 2013 austerity budget, designed to reduce the public deficit by containing public spending and increasing tax revenues.

The draconian budget aims to reduce the country’s public deficit to 4.5% of gross domestic product (GDP) next year from 6.3% this year. The text provides for a 7.3% cut in state expenditure and for additional taxes of 4%.

The government aims to generate EUR39bn (USD51.56bn) next year, EUR15bn of which will be derived from the recent rise in value-added tax (VAT). As part of the government's austerity measures, VAT was increased from 18% to 21% on September 1, 2012. The 8% reduced rate was increased on the same date, to 10%.

Other key tax measures contained in the budget include plans to reduce depreciation allowances by 30% in 2013 and 2014, to tax capital gains on assets sold within one year of purchase as income at progressive rates, and to subject lottery winnings in excess of EUR2,500 to a 20% withholding tax.

Ministerial budgets will be reduced by on average 8.9%. Despite its electoral promise, pensions are also to be affected by the austerity measures. The government has decided that pensions are to be re-valued less than initially planned.

The government forecasts GDP to shrink by 0.5% in 2013, compared to 1.5% this year. The Organization for Economic Cooperation and Development has predicted that the economy will contract by 1.4% next year, however. Spain’s Prime Minister Rajoy expects growth to return to Spain in 2014.

Finance Minister Cristobal Montoro recently defended the country’s 2013 general state budget in the Senate. By demanding a greater effort from Spanish citizens, the budget provides for the right formula to shorten the economic crisis, Montoro said.

Montoro insisted that it is precisely as a result of the policies pursued by the government that value-added tax collections are expected to have risen by 11.5% in November compared with the same month last year.

During the course of his speech to the Senate, Montoro reiterated that the aim of the 2013 state budget is to exit the crisis as soon as possible. While acknowledging that it is a difficult time, Montoro underlined the need to send out signals of confidence to the whole of Spanish society, and to emphasize that next year will be the last year of crisis and recession.

According to the European Central Bank’s latest forecast, no eurozone country will be in recession in 2014, Montoro observed.

Underscoring that the reduction of the country’s public deficit must remain a top priority, Montoro warned that failure to reduce the deficit in accordance with the path set would be to prejudice the possibility of further funding necessary for Spain to exit the economic crisis.

The Spanish government said back in October that it expects to collect more from the new tax measures contained in the draft 2013 budget than originally anticipated, although the revised figure will only make the merest of dents into the country's fiscal problems.

Spain’s tax hikes in 2013 have now been estimated at EUR4.55bn, EUR170m more than initially anticipated. Under the plans, about 70% of the additional tax levied would go to the central government while the remaining 30% will be hived off to the regions to tackle the local authority deficits.

The government expects to collect EUR2.4bn more in corporate taxes due to the tightening of depreciation rules, EUR800m with the introduction of a tax on lottery winnings, and EUR1bn following the tax hikes on capital income.

Despite the upwards revision of the tax revenue figures, the International Monetary Fund says that the budget deficit will reach 7% of gross domestic product this year and 5.7% next year, overshooting agreed targets of 6.3% and 4.5% respectively.

TAGS: Finance | tax | pensions | value added tax (VAT) | gross domestic product (GDP) | budget | tax rates | withholding tax | Spain | individual income tax

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