IMF Pressures Spain to Lower Salaries, Raise the VAT, Eliminate Housing Deduction

My friend Bran reports from Spain that IMF urging Spain to raise VAT, reduce public pay and positions, and eliminate housing deduction is the headline of every main news broadcast and newspaper.

The International Monetary Fund (IMF) has recommended Spain to cut the salaries of employees and increase the VAT and excise duties temporarily to compensate for the uncertainty over planned spending cuts, while the Government has claimed that eliminate the deduction of home buying and accelerate privatization. The report comes the same day it is known that the country's debt in the first quarter reached a record high of 72.1%.

In the annual analysis of the Spanish economy for the Article IV of the institution, the IMF notes that spending cuts are planned in the "right areas", but warns that "take time to identify them, will be difficult to implement and the results are uncertain. "

Therefore emphasizes that to assure that the projected savings will materialize, "future cuts in public wages and increases in VAT or excise duties could be approved now and cancel only if the objectives are achieved."

"Given the size of the necessary consolidation, no option should be ruled out," the IMF said in its report, which emphasizes that measures the revenue side should play "a more important role."

Christine Lagarde also suggests that to smooth projections of public debt should be given greater emphasis to privatization and coincides with the European Commission (EC) that the "reintroduced shelter deduction should be eliminated" .

Raising the VAT is Pure Insanity

Raising the VAT or any taxes in the midst of an economic depression is pure insanity. So what will Spain do? My guess is pay lip service to reducing public workers and salaries, pay lip service to badly needed reforms that would make it easier to fire people, but raise taxes as the IMF asks.

In other words, expect Spain to make token attempts to do what is really needed, yet fully embrace tax hikes that will cause major economic damage.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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