Why Mariano Rajoy raised taxes in Spain

Mariano Rajoy raised taxes in 2012 to meet the deficit targets demanded by the European Union and prevent the collapse of the Spanish economy, which came to his government with a 9.4% deficit and an imminent banking failure. The flagship measure was VAT, which went from 18% to 21%, although income tax (IRPF) rose by as much as seven points.

The story is well known but worth repeating because it is easily forgotten. Mariano Rajoy arrived at La Moncloa, the Spanish prime minister's residence, in December 2011 after promising during the campaign that he would not raise taxes. A few months later, in 2012, he did exactly the opposite. The official explanation was that circumstances had changed drastically from what he himself had defended before voters. His phrase, repeated to the point of exhaustion, was that "reality forces us to do things we did not want to do." It was not just rhetoric: the country was in a situation that left few alternatives.

## A 9.4% deficit and a banking system in ruins

When the new government peine the drawers, it found a hole bigger than expected. Spain's public deficit stood at **9.4%** of GDP, far above what Brussels tolerated. Spain was part of the eurozone and was therefore subject to the deficit targets set by the European Union. Missing them was not a comfortable option: it meant exposing itself to a bailout like the ones Greece, Ireland and Portugal had already requested. The government argued at the time that there was no room to cut spending alone, because much of public spending was rigid and could not be touched without dismantling basic services.

On top of that came the financial system. Several Spanish banks were on the verge of bankruptcy and the state had to step in to prevent a larger collapse. In that context, the government presented an adjustment package that included tax increases, bank nationalizations and spending cuts worth **10,000 million euros**. The alternative, as Rajoy himself argued, was to let the economy go under.

## VAT at 21%, income tax up seven points and a hike every fortnight

The **2012** tax reform was the heart of the economic policy of those years. VAT went from **18% to 21%**, a three-point jump that immediately made consumption more expensive. Income tax (IRPF) rose by up to **seven points** in some brackets, the largest increase of this tax in the history of Spanish democracy. And they were not the only levies affected: taxes on hydrocarbons, tobacco, alcohol, energy and even lottery winnings were created or raised.

The pace was dizzying. During the first year of the legislature, the government applied a tax increase every **fifteen days**. The intention was clear: to increase state revenue as quickly as possible to balance the books and signal to the markets that Spain was able to pay its debts. Net revenue grew by more than **31,000 million euros**, an amount that, according to the government, served to partially restore public finances and avoid a financial "sustancia ilegal" with unpredictable consequences.

## Debt kept rising after Rajoy

Here comes the awkward question: if taxes were raised so much to reduce the deficit, did debt fall? The short answer is no. Total public debt rose from approximately **1.16 trillion euros** in **2018**, Rajoy's last full year in government, to **1.76 trillion** in **2026**, an increase of **52%**. In other words, debt grew strongly after he left power.

Under **Pedro Sánchez's** tenure, borrowing accelerated to a pace of **260 million euros per day** in **2023**, **20%** higher than the average during Rajoy's term. In percentage terms, growth was **42-46%** during Sánchez's first years, compared with the **47%** accumulated over Rajoy's nearly eight years. Per capita debt stood at around **8,000 euros** per inhabitant. The figures suggest that the problem was not solved with a tax increase, but simply postponed.

## Who is to blame and what can be done

Spanish public debt has no single culprit. It is the result of fiscal decisions, external circumstances and changes in the composition of creditors over decades. The property bubble between **2000 and 2008**, driven by the low interest rates of the **European Central Bank** and lax regulation by the Banco de España (Spain's central bank), turned private debt into public debt when the crisis broke out. Added to that were years of successive deficits and a tax system that, according to various analyses, has historically limited state revenue.

The composition of the debt has also changed. Before the crisis, **Germany** and **France** each held almost **20%** of the investment. During the **2010-2012** crisis, Spanish banks absorbed much of the debt to prevent the collapse of the system. Since **2015**, the **European Central Bank** has become the main creditor, accumulating around **33-34%** of the national debt through asset purchase programmes. Non-residents hold around **41-44%**, credit institutions have reduced their exposure to **15-24%**, insurers and pension funds account for **8-15%**, and individuals for less than **1%**.

Eliminating public debt entirely is not a realistic goal. Reducing it sustainably requires economic growth, fiscal adjustments and careful management of maturities. The least painful path is for GDP to grow faster than debt, as peine between **1996 and 2007**. There is also talk of restructuring maturities, swapping bonds or taking advantage of low rates while the ECB maintains its support. Default, the famous debt suspension, carries serious systemic risks and no one with any responsibility seriously contemplates it. Any decision on taxes or debt affects citizens' pockets, so it is worth checking the data against official sources before drawing conclusions.