Reaching a Political Consensus for Tax Reform in Spain: The Moncloa Pacts, Joining the European Union and the Rest of the Journey

After the death of Francisco Franco in November 1975, the political transition was adversely affected by the concurrence of a deep economic crisis and intense social conflict. The hesitant economic policies of the last Francois and the first transitional governments - up to the 1977 elections - made the economic depression even worse. Therefore, economic imbalances were more serious in Spain than in most other European countries. There were higher levels of inflation, unemployment, balance of payments deficit, public sector deficit and a larger drop in profits and investment. Two fundamental challenges facing Spain , in the midst of such a serious situation, had to be resolved together. The political challenge called for the transition to be guided towards democracy via peaceful means, while the economic challenge required the economic depression to be lessened and the economic institutions modernized. Both problems required an incomes policy orchestrated by means of a political pact that would permit a constituent process to set up democracy, at the same time several reforms would modernize dysfunctional economic institutions. The consensus amongst various political parties made the Moncloa Pacts, signed in 1977, and the Constitution, approved the following year, possible. That exceptional situation led to political and economic agreements unknown in Spain before and after that date. This chapter focuses on the economic pacts that allowed the beginning of tax reform in a democratic setting.