Spain moves to cut taxes to boost nascent recovery

Spain announced on Friday it would cut income tax and reduce corporate tax to 25 per cent for large companies by 2016, aiming to speed up a nascent economic recovery.

The cuts are part of a proposed bill that is prime minister Mariano Rajoy’s main structural reform this year and also included reducing tax breaks to lift the country’s tax revenue, currently one of the lowest in Europe.

The government said the plan will boost gross domestic product by 0.55 per cent over the two years 2015 and 2016, but it has been roundly criticised by unions and economists as details of it were revealed over the last few months.

Unions say tax cuts are merely a populist measure ahead of elections next year while some economists say growth is not yet strong enough to justify tax cuts and the move risks hurting the government’s ability to meet its budget deficit targets.

"The moment has come for the Spanish to be recompensed for the efforts that they've made," treasury minister Cristobal Montoro said at a press conference following the weekly cabinet meeting.

“The moment has come to strengthen economic growth, stimulate savings, investment and job creation.”

The government said it would reduce the number of income tax bands to five from seven and cut rates on each band, while also reducing corporate rates for large companies to 25 per cent from 30 per cent over the next two years.

The lower income tax rates mean 20 million income-tax payers will have about €5 billion in additional disposable income over the next two years, Mr Montoro said.

Spain has been in and out of recession since a 2008 property crash which has left one in four workers unemployed and has put thousands of companies out of business.

The burst housing bubble sent revenues from the once lucrative construction and real estate sectors tumbling and helped push the public deficit to near-unsustainable levels.

Over the last three years, the government has passed a slew of unpopular tax hikes and deep spending cuts to bring down the public shortfall and convince nervous financial markets it can control its finances.

Spanish tax revenue as a percentage of GDP in 2012 stood at 32.5 per cent compared to the euro zone average of 40.4 per cent, according to European Union data released earlier this week.

Rather than directly boosting tax revenue by hiking taxes, the latest reform aims to widen the tax base by reducing available tax breaks and make the most of the economic turnaround, the government has said.

Reuters