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Spain, stepping back from austerity, seeks tax cuts

First Published      Last Updated Jun 21 2014 03:41 pm

Madrid — Turning its back on fiscal austerity, the Spanish government presented a broad package of income and corporate tax cuts Friday that are scheduled to begin before next year's general election.

The cuts roll back some of the tax increases that Prime Minister Mariano Rajoy began putting into effect shortly after his conservative Popular Party swept to power in 2011 by winning a parliamentary majority. The next election is scheduled to take place by November 2015.

Under the plan introduced Friday, which covers 2015 and 2016, taxpayers would pay an average of 12.5 percent less in income tax by the end of that period. Over the two years, corporate taxes would be reduced about 5 percentage points.

Cristóbal Montoro, Spain's budget minister, told reporters Friday, "The time has come to lower taxes for everybody."

But even as Spain's economy shows signs of improvement, its unemployment rate remains stubbornly close to its record level, at 26 percent. Rajoy also faces political challenges, including a corruption investigation into kickbacks paid to senior politicians in his Popular Party.

The plan is likely to come under close scrutiny from the European Commission, reflecting concern that reducing taxes could jeopardize Madrid's pledge to cut its deficit to 3 percent of gross domestic product by 2016 from an expected 5.6 percent in 2014.

On Friday, the government also rejected raising Spain's value-added tax despite suggestions from Brussels that Spain should consider increasing consumption levies and other indirect taxes to help meet deficit goals.

Instead, Montoro forecast that cutting taxes would increase both investment and consumption, helping to increase Spain's gross domestic product and keeping the country on track to meet its deficit targets.

The package of tax cuts had been expected since Rajoy described some minor fiscal concessions during his state of the nation address to Parliament in February, when he promised citizens to "soften demands now that the sacrifices that Spanish society has made are yielding fruit."

The tax plan underlines the extent to which Spain's economic situation has improved significantly from two years ago, when Rajoy was struggling to contain a recession and banking crisis that led his government to negotiate a European bailout to keep afloat Bankia and other banks being crippled by mortgage loan defaults.