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Austerity in Spain

(The Economist) IN HIS first appearance before parliament last month Mariano Rajoy, Spain’s new prime minister, said he had no intention of raising taxes. Only eleven days later, on December 30th, he brought in thumping tax rises on income, savings and property.

It was the sort of ploy Mr Rajoy’s Socialist predecessor, José Luis Rodríguez Zapatero (who preferred indirect taxes), never dared to make, not least because Mr Rajoy’s right-wing People’s Party (PP) would have accused him of bleeding middle-class wage-earners dry. But in the back-to-front world of budget deficits, principle is often the first casualty. In 2010 Mr Zapatero himself executed a famous U-turn, freezing pensions, raising the retirement age, cutting civil-service pay and imposing austerity on regional governments.
Mr Rajoy’s switch will turn Spain into one of Europe’s highest-tax countries. The top income-tax rate will jump by seven points to 52%, although few Spaniards declare an income above the €300,000 ($390,000) threshold. Then there are regional top-ups. Catalonia, for example, will now tax high earners at 56%. In Europe only Sweden has a higher rate. Even those at the bottom of the income scale will see tax rises. Taxes on savings will also go up. And property taxes, paid to town halls, will rise for richer owners.

When the left cuts benefits and the right raises taxes, something has gone wrong. In this case it is Spain’s budget deficit, which missed its 2011 target of 6% of GDP by a mile. Nobody yet knows how bad the overshoot is, but the government says the outcome could be 8% or more (see chart). That would mean Mr Zapatero’s government managed barely one-third of the task of cutting it from the 2010 figure of 9.3%.

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