On 14 August 2015 the International Monetary Fund (IMF) published the transcript of a conference call held to clarify issues arising from the discussions with Spain under Article IV of the IMF’s articles of agreement.

As Spain’s public debt is now approaching 100% of GDP there must be growth-friendly fiscal consolidation aim at reducing the level of debt. The IMF considers that this could be done at the national level by reviewing indirect taxes. The value added tax (VAT) system imposes VAT at a number of different rates for different goods and services. If this situation is corrected there could be simplification of the VAT system and more government revenue raised by the tax, thereby helping the fiscal consolidation.

The Spanish government recently announced a reduction in income tax, and a participant in the call suggested that with elections approaching there was unlikely to be any measure introduced that would increase taxes. The IMF team however favors a shift from direct to indirect taxes as this is considered to have less harmful effects on growth. A reduction in income tax is therefore considered helpful if it is part of a general shift to raising more revenue through indirect rather than direct taxation.

A simplification of the VAT rates and the elimination of VAT exemptions would raise the effective rate of VAT. This would be consistent with the fiscal consolidation and the reduction of public sector debt. The IMF view is that, in principle, economic growth and fiscal adjustment are consistent with a shift from direct to indirect taxation.