Upside Down and Inside Out Thinking –
Why the Spanish Government Needs to Stop Drinking the Austerity Kool Aid
The new labour laws in Spain were quickly hurried through Parliament last Friday. In effect the major point of them is that they make it easier to get rid of employees as you no longer need to pay them so much to sack them.
As a measure to reduce unemployment does that seem sound to you? If the only thing that has stopped companies sacking people was the fact that it is extremely expensive to do so then making it cheaper and easier short term can only do one thing: Increase Spain’s already unsustainable 23% unemployment rate even more and even faster!
It is another example of a stupid law that is not thought through and will do irreparable damage to the relationship between workers and owners in Spain while at the same time doing nothing to stop, slow down or even put a dent into the rising unemployment figures.
It is upside down thinking at its worst, totally driven by dogma and political Kant.
There is an alternative that puts an immediate hole in the unemployment figures and brings much needed money into the economy. (If you have read the first in my trilogy of articles about Spain and the economy here “Why Work In Spain Must Change” you will see various ideas in there.)
This idea comes from the consistently excellent Martin Varsavsky creator of Jazztel, Fon and Yacom amongst others. Varsavsky is an Argentinian entrepreneur based in Spain who consistently goes against the austerity mantra with excellent ideas. His position means he gets to present those ideas to those in power. The fact that those in power ignore those ideas show how little they know.
He says that maybe it was necessary to reduce the costs associated with getting rid of workers, something I totally agree with having previously employed people who had to go due to the economic situation in 2007-8 and having found it extremely, even prohibitively, expensive to reduce costs. However he also suggests it should be made a lot cheaper to hire people. (Article in Spanish)
The idea was presented to both Rajoy of the victorious PP and Perez Rubalcaba of the defeated PSOE before the last elections in Spain and unfortunately the winner Rajoy has decided to totally ignore it, plumping instead for the kool aid austerity programme being imposed from on high in Germany and from the IMF.
Spain cannot grow and get itself out of a problem with austerity. The country needs money going into the government through tax, something Rajoy has done by increasing taxes on the higher incomes in the country (but they will generally avoid it by not paying anyway) and also by money coming in through new business being set up or at least to stop the hemorrhaging in payouts to people currently unemployed by getting them back into work.
If you want an example of how difficult it is to take people on in Spain and start up a business you need look no further than an excellent couple of articles in the blog Desencadenado. One of them “How to set up a business in 3 hours for 71 Euros” (In Spanish) compares the difficulties of starting a business in Spain with the ease of doing so in London. In three hours you can have a virtual office in London for a minimum cost of €20 compared with a couple of months, a ridiculous amount of paperwork and time and costs, including having to have €3006 in an account to prove that you have the money to start a business, in Spain. (See notes below) Luis de Guindos, one of the two economy ministers in Spain, has recently stated that it is no longer necessary to wait for the paperwork to come through to start up your business you can just do it and then do the paperwork. He is missing the point somewhat. You still need to jump through the hoops but just at a later date and with the same costs.
Varsavsky talks about not paying social security for a period of two years for new employees amongst other measures. This would mean of course the government not getting anything in from the employee for a time but he argues that it also means the government is not paying out for social security and other payments that otherwise would impose a burden on the economy. He is totally and utterly correct and yet the politicians cannot see it.
Let’s look at the impediments to setting up a business here. In my experience there are thousands of people who want to but they are unable to do so because of the initial and ongoing costs of setting up in Spain.
To start with you decide you want to set up as a freelance web designer on a part time basis to start off with for example. A typical web design job in the Spanish market may cost anywhere between 500 Euros and 8000 Euros but the reality is that most people and businesses get it done on the cheap for around the 500 Euros mark. In order to earn this 500 Euros legally and bill it to a company the freelancer must do the following:
1) Start paying his self employed social security for which the typical cost is around 260 Euros per month
2) Get a Libro de Visitas (Visits book) with a cost of around 60 Euros.
3) Get a Libro de reclamaciones (Complaints book) Cost around 60 Euros.
4) Present a load of papers to start off with and ongoing every three months for which the only serious way to do it if you haven’t got a clue is hire a Gestor, a minimum cost of 60 Euros per month.
5) Collect VAT at 18% and hold it for the tax office making sure to pay it every three months, this is what you are paying your gestor to do.
There are other things that take time and money, I haven’t mentioned the 3006 Euros to start an SL (Limited Company) in the example costs here because this is just to be self employed. But you get the idea about the complexity.
So our web designer finishes off the website and is now able to bill. He bills 500 Euros plus VAT at 18% (90 Euros). As we can see his first month’s money is gone virtually as he has to pay out 440 Euros in the first month so he has done all of the work for 60 Euros. He actually pays out 90 Euros to the government, the VAT he has held back, and receives 60 Euros after paying out the costs, an effective VAT rate of 150%!!
The second month he is much better of of course. He doesn’t have to pay for the Libro de Visitas or Libro de Reclamaciones so he saves 120 Euros compared with the first month. Let us assume that the first company is impressed so they recommend his work to another company. They give him another 500 Euros contract and he does it in the month. He has now earnt 180 Euros but still pays out 90 Euros more to the government, so just an effective rate of VAT of 50%, much better right!
Two months work and two jobs have earnt him 240 Euros. By the end of the year he has earnt just 1500 Euros which isn’t going to pay for much food and rent doesn’t mean that the government gets any tax income in and will probably mean he has already given up of having any hope of working for himself and growing the company or service.
Let’s compare that to a freelancer in the UK with the same conditions. He opens a limited company for a fee of €71 as seen in the example on Desencadenado. (He chooses the higher fee because he wants a couple of extra services included in the package, a domain name, first year paperwork done in the UK etc…) At the end of the two months he has earnt 929 Euros with a part time job. Even if he continues to work at the same rate and doesn’t grow the business by the end of the year he has earnt around 6000 Euros. This is factored into his tax declaration and he pays some money out in Spain to the government. He is also much more likely to move forward and grow his business as he now has confidence that he can be successful having seen small successes during the year.
So what is the reality of the situation in Spain then?
Well the freelance web designer will still do the job and will still get 500 Euros. However this will be done without VAT and with the money paid in hand. At some indeterminate time in the future he will go legal when the income is enough to justify it. This time often never comes as he is by now so used to charging cash in hand.
Now let’s just expand on this point a little.
Just like our web designer, there are plumbers, builders, painters, teachers, lawyers, bars, restaurants and more doing this. One of the main questions in small transactions in Spain is, “Do you want a receipt for this?” meaning should I charge you VAT or not.
If it didn’t cost a fortune in money, and possibly more importantly time, to work in Spain then the Spanish government would get a lot more money in through VAT, direct taxes and consumption as the money filtered through the system and helped the Spanish economy grow or at least stay at the same level rather than plummeting into recession. Currently the downward spiral is continuing and unless there is some grown up, right way up thinking at the top nothing will change.
As I have said previously Spain must Change!
This type of business is totally legal but should only be done by people likely to be getting the majority of their business and who source the majority of their business outside of Spain. If it can be proved that you business is effectively Spanish in nature then the tax office in Spain will come after you. If you bill, advertise and attract business from outside of Spain in most part then it can be done and you take a dividend from the company as payment which you then declare to the Spanish tax authorities according to Desencadenado. This shouldn’t be necessary of course, it should be a similar regime here.
The other articles in this series can be found here