Prime Minister José Luis Rodríguez Zapatero announced last week the government’s decision to increase taxes, in a bid to obtain some much needed cash flow for Spain. 

He justified the controversial tax hikes as “acceptable” as part of efforts to reduce a burgeoning shortfall in the government’s finances. The tax increase appears to have been badly explained though, and the taxes that workers will pay are still not especially high compared to most of the other countries in Europe. The tax of on salaries at present is 16%, which will rise to 19% for salaries up to 6,000 euros and 21% for salaries over this amount. In the In the UK £6035 are tax free, then those up to 

This particular tax hike is expected to generate over 800 million euro, which is a small percentage of the forecast 11 billion euros the government hopes to raise. The biggest single chunk will come from eliminating the 400 euros annual tax rebate, which was started two years ago, before the housing boom came to a crashing halt.

Zapatero has forecast that unemployment, currently around 18 percent, will continue to grow, but that new jobs will be created in the second quarter of 2010, when the government hopes to be reaping the benefits of its economic plans. 

At the beginning of the summer many of Spain’s ministers stated that the country did not need to put up the taxes, but this past Saturday, the cabinet finally approved an ‘austerity’ budget for next year that would cut public spending by 3% and increase taxes.

A rise in the general VAT rate from 16 to 18 percent is another measure the governement is following, in a bid to raise more money. The plans are to increase some rates of IVA/VAT in July 2010.  It appears that the 4% rate is to be kept at 4%. This applies to items considered to be of basic need. It includes basic bread, frozen dough, eggs, cheese, milk, beans and fruit and vegetables, books, magazines and newspapers, school material with the exception of electronic items, medicines for human use, vehicles for the disabled, wheel chairs and collective transport for the disabled, prosthesis and implants, official protection housing.

The 7% rate is to increase to 8%. This applies to foodstuffs in general, with the exception of those in the 4% band, soft drinks, animals destined for human consumption or breeding, items used in agricultural, farming and forestry activities, such as seeds and fertilisers, contact lenses and glasses, disabled lifts and items for the diagnosis of illnesses, health assistance services, social services, and dental work, imported artworks and antiques, hairdressing, the handing over of housing, including garages and annexes, house construction (between promoter and contractor), services supplied by artists and technicians, sports, cultural and recreational services, exhibitions and fairs, funeral services, hotels and restaurants, cleaning of streets and public gardens, rubbish collection, transport of passengers and motorway tolls.

The General Rate, which is now 16% will rise to 18% in July 2010.  This includes all other products, including alcoholic drinks, tobacco, animals used in bullfighting, agricultural machinery, CD’s, devices for the diagnosis and monitoring of pregnancy, and television and radio services.  Economy Minister Elena Salgado said that these new tax measures will help to increase the gross domestic product of Spain by about one percent.  Taxes on savings, especially for the most wealthy, will also increase slightly, raising an extra €800 million that will offset a tax cut for small businesses to 20 percent from 25 percent.Presenting her first budget in parliament since she took over from outgoing Economy Minister Pedro Solbes earlier this year, Salgado said that the government is targeting a 21.2-percent increase in revenues next year to 121.627 billion euros. Despite the increase in revenues, the government insists that the tax burden will remain below the levels it inherited from the conservative Popular Party (PP) when the Socialists took power in 2004.

The budget also includes a freeze on the salaries of top-ranking officials and a cut in public sector jobs for the second year in a row.  Salgado described the efforts to keep expenditure in check as “unprecedented”.

However, PP spokesperson Sáenz de Santamaría critisised the fact that Spain’s public debt is set to rise almost 22 percentage points from the start of the crisis in 2007 to 62.5 percent of GDP in 2010. The government said that despite the increase, Spain’s total public debt remains well below that of other countries in Europe.

The government is aiming to reduce the public deficit to 8.1 percent of GDP from an estimated 9.5 percent this year and to 5.2 percent in 2011, bringing it in line with the European Union ceiling of 3 percent in 2012.The debate on the budget in Congress is due to start later this month with voting to begin in December. Salgado said that the government was open to proposed amendments and remained “absolutely convinced” the budget would be approved.

Just over half of the planned expenditure for next year has been set aside for items such as pensions and unemployment benefits.  “I don’t understand the idea that the political groups on the left have said that with these tax hikes, it will be difficult to approve the budget,” Salgado said. The minister insisted that most of the burden of higher taxes would be felt by those best able to absorb them and called for solidarity among Spaniards to facilitate the country’s recovery, and the mooted tax increase would avoid “a large tax rise in the medium term or a reduction of services.

Parties across the political spectrum, as well as the country’s labor unions and employers associations, found little positive to say about the controversial tax hikes included in the 2010 budget, but niether did they come up with alternative solutions to improve the countries revenue, and improve services.

“We are aware of the collective effort we are asking for, but we are sure that the budget is the one this economy requires” to recover from the crisis, Vice President María Teresa Fernández de la Vega said Saturday, after the cabinet’s approval of the 2010 budget proposal.

The government will probably have some trouble getting the support it needs in Parliament to pass the budget, but it is struggling more to gain broader consensus, only three months before it takes its turn at the presidency of the European Union.

Spain is not alone in its deficit troubles. Many Western governments are struggling to pay for higher social spending as revenue has fallen in tandem with a deteriorating global economy. Ireland has already increased taxes and is considering whether to do so again in 2010. Britain will bring its valued-added tax back to 17.5 percent after having cut it to 15 percent, and Finland will raise its value-added tax next year. Italy is also struggling with its finances, as are Germany and France.