Rajoy raised VAT to 21% with a 9.4% deficit and empty coffers

Why Rajoy raised taxes: from 'no more taxes' to VAT at 21%

On 23 December 2011, Mariano Rajoy was sworn in as Spain's prime minister with a campaign slogan still fresh: no more taxes. Fifteen days later, his government approved an increase in personal income tax withholdings. Seven months on, VAT rose from 18% to 21%. The question that hangs over every anniversary of that U-turn is not whether it was an electoral betrayal —it looks like one— but whether a real alternative existed with a runaway deficit and the public coffers effectively under external supervision.

The starting point: a 9.4% deficit and suspended payments

On taking office, Spain carried a deficit of 9.4% of GDP and a brewing banking collapse. The report by the state's audit office (Intervención General del Estado) in April 2012 uncovered an additional shortfall of between 20,000 and 30,000 million euros, with the autonomous regions running deficits above 9% and payments already falling due. The government's official line was that "reality forces us to do things we didn't want to do": raise taxes, nationalise banks and cut 10,000 million euros in spending.

The 2012 tax reform included the VAT rise from 18% to 21%, an income tax increase of up to seven points —the largest in Spain's democracy— and new taxes on hydrocarbons, tobacco, alcohol, energy and lottery prizes. The pace was one tax rise every fifteen days during the first year. Net revenue increased by more than 31,000 million euros.

Did it bring Spain's public debt down?

No. Total debt rose from roughly 1.16 trillion euros in 2018 to 1.76 trillion in 2026, a 52% increase. Under Pedro Sánchez, borrowing accelerated to a pace of 260 million euros a day in 2023, 20% above the average of Rajoy's term. Percentage growth has been steeper under the socialists: 42-46% in Sánchez's first years versus the 47% accumulated over Rajoy's nearly eight years.

Some argue the problem was not the rise but the promise: signing up to "no more taxes" without looking under the bonnet. Against that weighs the argument that the shortfall was deliberately concealed to avoid losing the election. Both sides lie, some by action and others by omission, and the voter picks up the tab in both cases.

Who is to blame for the debt: structural factors

Public debt has no single culprit. Regressive taxation and impunity for tax fraud historically limited state revenue. The property bubble (2000-2008), fuelled by low ECB interest rates and lax regulation by the Banco de España, turned private debt into public debt. Successive governments piled up deficits: Sánchez's posted a cumulative increase of 71,878 million in the last year (2023-2024), pushing per capita debt to around 8,000 euros.

The composition of creditors has changed radically. Before the crisis, Germany and France each held almost 20% of the investment. Since 2015, the ECB has accumulated close to a third of the national debt through asset purchase programmes. Non-residents: 41-44%. Credit institutions: 15-24%. Insurance and pension funds: 8-15%. Private individuals: less than 1%.

How could Spain's public debt be reduced?

Full elimination is not realistic. The most effective route is sustained economic growth that outpaces debt growth, as in the 1996-2007 period. Then come fiscal adjustments with primary surpluses and structural reforms that boost competitiveness. In extreme scenarios, maturity restructuring or even default are mentioned, though these carry serious systemic risks.

The full breakdown, item by item, of where to wield the knife —pensions, healthcare, administration— yields a surprising difference. But any cut runs into the same wall: every point of spending is a captive vote.

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One jarring fact remains: the government that promised not to raise taxes collected 31,000 million more and, even so, the debt kept climbing. The knife never reached the root.