Spanish Firms on the Hook for Rajoy’s Renewed Deficit Drive

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(Bloomberg) -- For Spanish companies, it may be time to pay up again.

Executives in Spain, who’ve seen their profits shielded by writeoffs since the economic crisis ended, are bracing for a round of tax increases as Prime Minister Mariano Rajoy seeks to narrow the budget deficit without hitting the consumers helping to drive the recovery.

The government aims to raise as much as 4.7 billion euros ($5 billion) from company levies and special taxes on alcohol and tobacco as part of a fiscal package designed to meet European Union deficit targets, Budget Minister Cristobal Montoro said Friday. As part of its effort, the administration aims to limit spending to 118 billion euros in 2017, a 5 billion-euro drop from this year, Montoro said.

Serial budget offender Rajoy is trying to rein in the government’s shortfall after narrowly avoiding a fine for flouting EU deficit demands last year in the runup to a general election. But he has to avoid squeezing companies too hard -- he’s also promised voters half a million new jobs a year and economic growth is already slowing.

“Rajoy is facing pressure from Brussels to present a credible budget that can reduce the deficit, but he doesn’t have the majority in parliament to do it,” said Angel Talavera, an economist at Oxford Economics in London. “Targeting companies, rather than going after taxes that affect the middle class, is the easiest and least damaging option.”

Montoro is aiming for a parliamentary vote on his plans on Dec. 15 and the government expects to submit its draft budget to officials in Brussels next week.

Growth Forecasts

Economy Minister Luis de Guindos also upgraded the nation’s growth forecast Friday, to 3.2 percent from 2.9 percent for this year, and to 2.5 percent for 2017. He said the government will meet its goal of limiting the deficit to 4.6 percent of output this year and 3.1 percent next year. To further bolster tax revenue, Montoro said he will beef up tax auditing of sales tax, limit cash payments and is considering a special levy on sugary drinks.

The 61-year-old Rajoy has never delivered on his annual pledges to honor Spain’s budget commitments and this year’s spending plans were delayed by the 10-month struggle to form a government after he lost his majority in December. Now at the head of a minority government, the prime minister will need cross-party support to pass a budget.

Read more: The challenges facing Spain’s new government

With the Spanish economy expanding for a third straight year, Rajoy has ruled out further increases in the sales tax or income tax, which are unpopular among Spaniards and could hurt consumption. Instead, he’s looking to companies to foot the bill.

While operating earnings have almost doubled to 168 billion euros ($178 billion) since 2012, the government’s revenue from corporate levies has stagnated because tax breaks allow firms to set their losses from the crisis years off against their current liabilities. In the past, companies in Spain contributed roughly twice as much to government revenue as those in other euro-area nations.

‘Changing the Rules’

The effects of the crisis helped bring Spain into line with France and Germany, but Rajoy’s latest plans suggest that may prove a temporary respite for executives. In a further hit to profit margins, the government agreed a deal with the Socialists to increase the national minimum wage by 8 percent to about 708 euros, Montoro said.

“The government is changing the rules half-way through the game,” said Enrique Chinchilla, professor of Financial Management at the Barcelona-based IESE Business School. “You can argue some companies resort to fiscal loopholes to pay less, but you can’t deny the fact that many companies have disappeared as a result of the crisis and others still carry massive tax losses. You can’t squeeze out taxes if there is no business.”

Corporate tax revenue in the first ten months of the year was 19.1 billion euros compared with 17 billion euros a year earlier, according to the Tax Agency. Spain’s 2016 budget estimates the revenues from the corporate tax at 24.8 billion euros.

In August, the European Commission ordered Rajoy to bring Spain into line with the EU’s 3 percent limit on budget deficits by 2018, a two-year extension on previous demands, and set targets of 4.6 percent for 2016 and 3.1 percent for next year. Rajoy says this year Spain will meet its goal.

The latest effort to narrow the deficit is adding to executives’ frustration with prime minister. While companies welcomed the 2012 labor reform which made it easier to hire and fire staff, the same year the prime minister imposed restrictions on tax deductions linked to interest payments with companies struggling at the height of the crisis. In September, he rushed through a rule bringing back an accelerated timetable for corporate tax payments which had been scrapped just a year earlier.

“These last-minute decisions, without any consultation, are a drag on competitiveness and an extra burden,” Bernando Soto, head of tax policy at the main Spanish business lobby, the CEOE, said in an interview. “This is not only unfair, it’s self-defeating if we look at the jobs companies create and the fact that many small- and medium-sized companies are still absorbing losses from the crisis.”

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