Spanish prime minister Mariano Rajoy has announced an increase in IVA (sales tax) of 3% as part of another round of austerity measures and spending cuts, despite opposing an increase during his election campaign.
The increase will see the IVA rise from 18% to 21% along with a further 3.5 billion euro cuts to local authority budgets.
Products such as public transport fares, processed foods and bar/hotel services will increase 2 points to 10%. The lowest rate of 4% on basic items such as bread remains unchanged.
The measures are required as part of the bailout terms agreed in Europe this week.
Rajoy told MP’s that these measures would cut the budget by 65 billion euros over two-and-a-half years, or 6.5% of GDP.
“The excesses of the past are being paid for right now,” Rajoy said, adding that Spain had never before experienced such a recession.
Spain is till sitting on 25% unemployment, despite seasonal changes, and this is what is driving Rajoy to push on with further spending cuts.
“What animates us is the five million people out of work,” Rajoy added.
Budget Minister Cristobal Montoro puts much of the blame for the increase on Spain’s underground economy claiming too many traders present customers with the option of removing the IVA at the point of sale by paying cash, something which Montoro describes as “a national sport”.
“If VAT was paid by more of those who are supposed to pay, it would not have to be raised by so much,” Montoro told a forum of business leaders.
The government are also discussing the option of removing IVA subsidies from products such as tourism and some food and drinks.