Weekend Economists Waiting for Godot March 7-9, 2014

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51. Spain should impose fiscal devaluation to restore competitiveness, experts say

http://elpais.com/elpais/2014/03/06/inenglish/1394119222_386672.html

The panel of experts selected by Finance Minister Cristóbal Montoro to draw up proposals for an overhaul of the tax system has suggested that the government impose a so-called fiscal devaluation that would consist of higher indirect tax rates to offset a cut in Social Security contributions made by employers with a view to boosting competitiveness, sources close to the panel said.

This formula would drive exports by lowering the cost of producing goods in Spain because of the cut in social contributions, given that overseas shipments are exempt from value-added tax. At the same time they would make imports more expensive because of the increase in VAT, thereby helping to improve the country's trade balance. This also would have a positive impact on employment but would have little effect on overall GDP.

The report the panel -- which is headed by university professor Manuel Lagares -- is due to deliver on Friday is expected to be along the lines of recommendations by international organizations such as the International Monetary Fund, which tend to be broad with few concrete details. It will not, for example, suggest specifically that the standard VAT rate of 21 percent be raised.

The main problem facing the government in implementing fiscal devaluation is the scant room it currently has to cut social contributions despite the fact that these in Spain are among the highest in Europe, at 35.35 percent of gross salary between employers and employees. This is due to high unemployment and wage devaluation as a result of the crisis causing an imbalance in the state pension system, which is currently paying out more than it is taking in. A cut in Social Security contributions would further exacerbate the shortfall.