The high street in Spain is set for more pain. Everyday living costs like heating, phone bills, clothes and haircuts have gone up in price following a hike brought in this month in value-added tax, VAT, to 21 percent.
The rise comes on the back of August’s surge in consumer prices up from 2.2 percent to 2.7 percent.
Frightened of losing even more custom in the middle of a recession many Spanish shops, supermarkets, restaurants and leisure companies have said they will not pass on the increases.
Madrid is desperate to raise cash to slash 65 billion euros off the public deficit by 2014.
The three percentage point rise from 18 percent to 21 percent puts Spain broadly in line with other European countries. One consumer organisation calculated it will mean and extra outlay of 470 euros per family annually. Government revenue is set to increase by seven and a half billion euros.
This latest move to try and keep the deficit in line has the potential to inhibit consumer spending even further and so make the recession worse in a country where many are struggling under the weight of falling wages with nearly one in four out of work.
To discuss the effects of Spanish VAT going up, we spoke to Ileana Izverniceanu in Madrid. She is the spokesperson of the OCU Spanish consumers’ organisation.
euronews: The OCU has calculated that the VAT rise to 21% is going to cost families 470 euros per year. Do you confirm that, and in what areas most noticeably?
Ileana Izverniceanu: That is being confirmed, because the increase is very noticeable at back-to-school time. Major spending after the summer already shows the VAT impact. And these are unavoidable purchases. A person can go without buying new jeans, can use the car for longer and doesn’t have to get a new TV. But schoolbooks or uniforms they have to, right away, at the beginning of September. We really see the VAT rise has put a hole in families’ wallets. We calculated 470 euros being added to basic spending during the year. That’s not taking into account recreation or culture, which will also feel it a lot. We stuck to very basic things that a family can’t avoid. And that’s going to affect their budget dramatically.
euronews: Some stores expect to pass the increase on to their customers gradually, it seems, but big retailers have guaranteed they won’t do this – how do you believe they will really behave?
Izverniceanu: We’re a bit wary of that. When VAT was raised the last time, by Prime Minister in 2010 José Luis Rodríguez Zapatero, who raised it from 16% to 18%, a lot of supermarkets and integrated stores promised it wouldn’t impact on the customers. First, we want to know for how long they’ll keep that up. Advertising alone doesn’t last, in many cases. We want them to give a date up to which they will spare consumers, or perhaps it’s never, until the next time VAT goes up. We want a clear deadline statement.
We also did a survey and saw that a major Spanish supermarket chain raised its prices before, which means they cheated. They won’t charge more in VAT, but they raised prices earlier and so the consumer ends up paying.
euronews: We first saw the VAT impact in transport, and petrol prices are one of the most sensitive subjects. Will petrol end up costing a euro eighty, as some predict? Do the oil companies have excessive profit margins, as the government says?
Izverniceanu: Petrol will probably keep going up, and that’s another dramatic spending increase for families. The OCU has condemned a lack of competition in Spain for a long time. There are price-setting agreements which can’t go on, whereby the different petrol stations have almost the same prices from one to the next. We agree with the government that something must be done; but we believe its for the government to do. It’s not enough to deregulate and let companies go on doing things their way. If the companies don’t liberalise themselves there should be price intervention, we believe, with a product as basic as petrol – action by the government, if prices don’t come down. That’s also for them to govern.
euronews: If we’re looking to increase revenue, won’t this paralyse the economy even more, like in other countries in the south of the euro zone, now under surveillance, like Portugal? Won’t more money go into the black economy?
Izverniceanu: Yes, obviously. You can get a kitchen appliance fixed today and the repairman will let you avoid paying VAT. That’s a step decades into the past. The economy will get even deeper into a hole. As soon as the VAT decision was announced it was condemned. What’s more, it’s breaking a campaign promise not to raise it. This paralysis will drive the economy further underground. I’ll say it again: the with or without VAT question in the 21st century is back with a vengeance!