Spain to impose wealth tax to battle deficit

Spain will impose a wealth tax in 2011 and 2012 to help slash the public deficit, Finance Minister Elena Salgado said last Thursday.

The wealth tax, which had been suspended in 2008, was due to go to a weekly cabinet meeting last Friday for approval, she said, in Spain’s latest effort to show markets it can meet its ambitious deficit-cutting targets.

If reinstated in the same form, the wealth tax would hit about 160,000 people and boost state revenues by about €1.08 billion, the finance minister told a news conference.

The tax money would roll in during 2012 and 2013, “which are years when we have to carry on our effort to reduce the deficit in accordance with a stability agreement agreed with the European Union,” Salgado said.

Spain had to press ahead with efforts to “favour financial stability and our growth,” she said.

Salgado said “all possible liquidity” from the tax will go Spain’s 17 regional governments, many of which are loaded with debt and struggling to meet deficit-cutting targets.

“They will be able to count on more resources to confront their costs,” the minister said.

People’s homes would be exempt from the wealth tax up to a value of €300,000 and their other assets exempt up to €700,000, Salgado said.

Spain has promised to reduce its annual public deficit from the equivalent of 9.2 per cent of gross domestic product last year to 6.0 per cent of GDP this year, 4.0 per cent in 2012 and 3.0 per cent in 2013.

Doubts linger over its capacity to reach those goals because of the slow pace of economic growth, an unemployment rate of more than 20 per cent and stubborn deficits in the semi-autonomous Spanish regions.

Spain has scrambled to stay ahead of the markets by taking sweeping measures to ensure it can keep its deficit-cutting promises and avoid the fates of Greece, Ireland and Portugal.

Earlier this month, senators gave final approval to reform the Spanish constitution and impose a rule banning big budget deficits except during major crises.

In August, the government took steps to raise €4.9 billion by forcing big companies to pay some tax instalments earlier and by obliging health authorities to buy cheaper generic medicines instead of brand names.

It also halved value added tax on purchases of new homes until the end of 2011 so as to inject life into a sector flailing since the 2008 property bubble collapse.

Last year, the government raised sales taxes, froze old age pensions, cut public workers’ wages by five percent, forced banks to strengthen their balance sheets, raised the retirement age and made it easier for firms to hire and fire.