Business | Retail

Spanish shoppers grapple with sharp VAT hike

Consumers face having to make painful adjustments on buying habits

Reuters
Published: 13:01 September 3, 2012

Image Credit: Reuters
People walk past a shoe store in a shopping district in Madrid.

Madrid: Cash-strapped Spanish shoppers and small businesses are resigned to more pain as everyday living costs become more expensive following a hike in value-added tax.

The government has raised its main VAT rate by three percentage points to 21 per cent as part of a drive to slash 65 billion euros ($82 billion) from the public deficit by 2014 and save the country from a full international bailout.

But many in the country fear the move will only deepen a second recession in three years.

“What can you do? The government takes these measures and we just have to accept what comes,” said Carlos Asis Alema as he shopped for food at the Mercado de las Ventas, a large market with stalls in Madrid.

The Organisation for Consumers and Users, or OCU, estimates the tax hike will increase the average family’s spending by 470 euros a year. Some larger companies such as Inditex, which owns the Zara clothes chain, and leading supermarket chain Mercadona said they would not pass the higher cost on to their customers.

That had smaller businesses concerned that they will suffer since they cannot squeeze margins the way the big firms can and retail sales have fallen every month for more than two years.

Mirardo Moya Cota, employee at a dry cleaner and clothes mender, said the business where he works has had to raise prices. While the prices don’t look that much higher on individual items, it adds up bit by bit, he said.

“It’s horrible, it hurts all of us, especially those of us who are less well off,” said a shopper.

Defaults on consumer and mortgage loans have soared in Spain, and evictions from homes have also jumped. Companies and the public sector have cut wages. The government does not expect an economic recovery to start until next year and job creation may still be several years off.

Spain is trapped in a vice. On the one hand the government must drastically cut spending and lay off public workers to show investors it can control the public deficit and try to bring down sky-high borrowing costs.

On the other hand, tax revenue is shrinking because of joblessness and recession so the government has increased taxes to try to keep the deficit in line, which in turn inhibits consumer spending and makes the recession worse.

Prime Minister Mariano Rajoy, who pledged in his campaign last year not to raise VAT, recognised in a speech last week that the tax hike was “painful”. The VAT hike puts Spain broadly in line with other European countries. The 18 per cent rate was lower than most.

The tax on theatre and cinema tickets and other cultural and entertainment items also rose to 21 per cent from 8 per cent, which has art institutions fearing their industry could be pushed over the edge.