June 20, 2014 / 2:56 PM / 3 years ago

UPDATE 1-Spain to cut taxes to boost nascent recovery

5 Min Read

* Government unveils tax reform proposal

* Proposes cutting tax for big companies to 25 pct vs 30 pct

* Tax rates to be cut for workers, VAT rate left unchanged

* Economists say growth not strong enough for tax cuts (Recasts to include official proposal)

By Paul Day

MADRID, June 20 (Reuters) - Spain announced on Friday it would cut income tax and reduce corporate tax to 25 percent for large companies by 2016, aiming to speed up a nascent economic recovery.

The cuts are part of a proposed bill that is Prime Minister Mariano Rajoy's main structural reform this year and also included reducing tax breaks to lift the country's tax revenue, currently one of the lowest in Europe.

The government said the plan will boost gross domestic product by 0.55 percent over the two years 2015 and 2016, but it has been roundly criticised by unions and economists as details of it were revealed over the last few months.

Unions say tax cuts are merely a populist measure ahead of elections next year while some economists say growth is not yet strong enough to justify tax cuts and the move risks hurting the government's ability to meet its budget deficit targets.

"The moment has come for the Spanish to be recompensed for the efforts that they've made," Treasury Minister Cristobal Montoro said at a press conference following the weekly cabinet meeting.

"The moment has come to strengthen economic growth, stimulate savings, investment and job creation."

The government said it would reduce the number of income tax bands to five from seven and cut rates on each band, while also reducing corporate rates for large companies to 25 percent from 30 percent over the next two years.

The lower income tax rates mean 20 million income-tax payers will have about 5 billion euros in additional disposable income over the next two years, Montoro said.

Spain has been in and out of recession since a 2008 property crash which has left one in four workers unemployed and has put thousands of companies out of business.

The burst housing bubble sent revenues from the once lucrative construction and real estate sectors tumbling and helped push the public deficit to near-unsustainable levels.

Over the last three years, the government has passed a slew of unpopular tax hikes and deep spending cuts to bring down the public shortfall and convince nervous financial markets it can control its finances.

Tax Revenue Up

Spanish tax revenue as a percentage of GDP in 2012 stood at 32.5 percent compared to the euro zone average of 40.4 percent, according to European Union data released earlier this week.

Rather than directly boosting tax revenue by hiking taxes, the latest reform aims to widen the tax base by reducing available tax breaks and make the most of the economic turnaround, the government has said.

Tax revenue was up by 5 percent in January to May compared to the same period last year, Montoro said, despite relatively low growth and near-zero inflation.

With Rajoy facing voters next year, and his conservative People's Party (PP) suffering tumbling support in the polls after years of austerity measures, the reform has been slammed by some as political opportunism which could backfire.

"The fiscal reform is based on a scenario of strengthening economic recovery, of which we have serious doubts," the head of Spain's second-largest union UGT, Candido Mendez said this week.

Spain's economy is forecast to grow 1.2 percent this year after shrinking, or stagnating, since 2009 and the government has targeted getting the budget deficit below the official EU ceiling of 3 percent of output by 2016. The deficit stood at 6.6 percent of gross domestic product in 2013.

The Bank of Spain reiterated calls this week to increase consumer taxes such as value-added tax (VAT) to boost cash flow into government coffers, but the government has insisted that it will not raise VAT further after a 2012 hike.

It will instead limit VAT hikes to health products, raising them to 21 percent from 10 percent currently, although the timeframe was unclear.

It will also cut tax payable on income from savings, the government said on Friday, reverting to 2011 rates before Spain was forced to raise taxes to close the budget gap.

More details of the reform proposal will be presented on Monday, Montoro said. (Editing by Julien Toyer and Susan Fenton)

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