Spain tax reform must aid low-paid, IMF report warns

The logo of the International Monetary Fund (IMF) at the organisation's headquarters in Washington, DC. (AFP/Saul Loeb)

MADRID: International Monetary Fund (IMF) researchers on Thursday urged further efforts by Spain to make its tax reforms pay off and ensure they benefit the lowest-paid workers as the country crawls out of recession.

With growth strengthening in the euro zone's fourth-biggest economy but unemployment still extremely high at nearly 26 per cent, Spain's conservative government last month announced tax cuts for next year, when a general election is due.

The government said the cuts to corporate and income tax would boost the economy and create new jobs after years of budget-cutting austerity. It currently forecasts growth of 1.2 per cent this year.

In an annual report on Spain published on Thursday, the International Monetary Fund reiterated that Spain "has turned the corner" after the economic crisis that started in 2008, through tough measures to clean up the public finances.

"The forthcoming tax reform is... a critical opportunity to support the fiscal consolidation goals with a more growth- and job-friendly tax system," the researchers wrote.

But the tax reform as announced so far "is revenue-losing", said the IMF's mission chief for Spain, James Daniel, presenting the report in a conference call.

"That will need to be compensated by further measures in the future," he said.

"Secondly, it seems to us that there are many positive areas for employment but maybe it could be better directed at the low-paid by cutting social security contributions on employing them."

This should be done by increasing indirect tax revenue, for example by raising excise duties and withdrawing reduced VAT rates on certain items, the researchers wrote.

They said revenue could also be boosted by "broadening the base of direct taxes" on companies "by cutting exemptions" and lowering the threshold for the top rate of income tax.

The government has said it will cut the top rate for those earning 60,000 euros (US$82,000) or more a year from 52 per cent in 2014 to 47 per cent in 2015 and 45 per cent in 2016.

It said the lowest income tax rate on those earning less than 12,450 euros a year will be cut from 24.75 per cent in 2014 to 20 per cent in 2015 and 19 per cent in 2016.