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BUDGET

Spain plans to hike taxes on rich and companies in draft 2021 budget

Spain plans to increase taxes on corporations and the wealthy to help fund greater spending on infrastructure and health and rebuild its pandemic-ravaged economy, according to the government's draft budget for 2021 presented Tuesday.

Spain plans to hike taxes on rich and companies in draft 2021 budget
A protest against health cuts in Madrid earlier in October. Photo: AFP

Public spending will be 10 percent higher than in 2020 under the draft budget which will include 27 billion euros ($32 billion) from a massive European Union coronavirus recovery plan, Prime Minister Pedro Sanchez told ahead of a cabinet meeting which is set to approve the plan.   

The amount of money allocated to public spending is “the most ambitious in our democratic history,” said Sanchez, whose Socialist govern in a minority coalition with far-left Podemos.

Spain, one of the EU nations worst hit by the EU by the pandemic, is set to receive a total of 140 billion euros in grants and loans over the recovery fund's 2021-26 lifetime, making it one of its biggest beneficiaries along with
Italy.   

The draft budget calls for higher corporate taxes on big companies, a raise in the income tax on high earners, and a hike in the value-added tax on sugary drinks.

The extra revenue will help fund a 151-percent rise in the public health budget, which will receive an extra three billion euros, of which 2.4 billion will come from EU funds to buy vaccines and strengthen the country's primary care network.   

“We are inaugurating a new stage in Spain's economic policy, which definitely leaves behind the neoliberal stage of austerity and budget cuts,” Sanchez's deputy and the leader of Podemos, Pablo Iglesias, said.

The budget plan will still have to be approved by parliament, where the government controls just 155 out of 350 seats.   

Passing an annual budget has become highly complex in Spain in recent years as the rise of new parties has led to an increasingly fragmented parliament.    

Sanchez's first term in office ended with a snap election last year when he failed to win support for his budget, and he has been governing since with a 2018 budget that has been rolled over twice.

The Spanish government said last month that it would have to suspend the fiscal rules EU-member states must normally meet, in 2020 and 2021, as a result of the pandemic's impact on the economy.

The annual public or budget deficit stood at 6.46 percent at the end of June and is seen rising to 11.3 percent at the end of the year.    

EU finance ministers agreed in March to suspend stringent rules on running public deficits in the bloc in to allow member states to spend freely to tackle the impact of the coronavirus pandemic.

READ ALSO: Why Spain is the only country in Europe where taxes are rising during the pandemic

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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