The government approved an aid package to combat the consequences of the war in Ukraine. He drafted up to six legislative decrees and used the budget plans to try to mitigate the effects of energy prices and the resulting inflation. Among other things, the tax on electricity bills was reduced, the social bonus for heat and electricity was increased, the VAT was reduced on gas and basic foodstuffs, checks were granted to needy households, industry aid was distributed and the income tax was increased for incomes with lower incomes at a price of more than 21,000 Euros, fuel was subsidized and train tickets and free Media Distancia, Cercanías and Rodalies were subsidized. The executive will withdraw almost all of these aid packages at the end of the year: energy reductions, transport aid and the reduction in VAT on food will not last until 2024. This was foreseen in the approved decrees and will be communicated to Brussels in the communication next budget that the government will present before October 15. Only the reduction in income tax and the free Cercanías service are retained. Everything else will return on December 31st. The decision will mean an increase in tax revenues and have a noticeable impact on energy costs and inflation.
Sources in the acting executive confirm that no calendar changes are planned to date and that this is the deadline set in the stability program sent to Brussels in the spring, although they acknowledge that there are concerns about the impact the decision could have on prices in the short term. The Bank of Spain has calculated that energy prices could rise by 25% year-on-year in the spring, partly due to base effects, partly due to the rise in oil prices and largely due to the withdrawal of energy measures. Of the average inflation that the watchdog expects for next year, which is expected to rise by 4.3%, around 1.5 points are due to the suppression of all measures. That means: almost a third of the price increases next year. Such an increase could lead the newly formed government to reconsider the full repeal and consider staggering it to mitigate the rise in the CPI, or retain some measures but focus much more on vulnerable groups. But this is not currently on the incumbent government’s table.
On the one hand, the burst of inflation triggered by the Russian invasion has subsided. In fact, price increases in Spain in recent months have been the lowest in the Eurozone. In August, due to the rise in oil prices, it rose slightly to 2.6%, a far cry from 5.6% in the single currency bloc. On the other hand, the budget rules should be restored next year. Brussels is beginning to demand that public finances be gradually reallocated according to the costs incurred by the pandemic and the war in Ukraine. And for next year they are demanding the withdrawal of the extraordinary and far-reaching measures aimed at alleviating the energy crisis, which, according to the tax authority, amounts to about 13 billion per year, equivalent to about 1% of GDP. In this way it would be possible to reduce the budget deficit from around 4% of GDP to the 3% target set by the executive, a hole that represents almost 40,000 million euros. In the absence of further adjustments, this goal appears to be unattainable without the total or partial withdrawal of this aid. According to the tax office, the reductions in energy taxes alone amount to almost 7 billion euros per year.
The government has told Brussels it will cut the deficit to 3.9% of GDP this year and cut it by another nine-tenths in 2024, to the desired 3% set by European fiscal rules, which are now suspended are and are in the review process. Failure to achieve this target could result in the consequences of an excessive deficit procedure.
Cristina Herrero, President of the Independent Authority for Fiscal Responsibility (Airef), explained the recommendation that Brussels made to Spain in the spring at an informative breakfast on Thursday: “For many countries there is a specific recommendation that also applies to Spain.” Us it is said that the measures to deal with the energy crisis and the price crisis must now be withdrawn. And what he then adds in a slogan is that if it were necessary to expand one measure or put another on the table, the greatest possible concentration is required now.”
The first measures to reduce energy prices were conceived in mid-2021, when gas began to become more expensive with the recovery in post-Covid demand and congestion in supply chains. But it was only after the Russian invasion of Ukraine in February 2022 that the government drafted more comprehensive aid. These include the fuel bonus, which has already been abolished for all drivers and is now being phased out for traders, the reduction in electricity tax, which includes a reduction in VAT to 5%, and the special tax on electricity to 0.5%. and the suspension of the tax on the value of electricity production as well as the reduction of the VAT on natural gas, biomass pellets and firewood for heating. The successive packages that were approved also envisaged cuts in other areas, from VAT on basic goods to free medium-distance, cercanías and rodalies transport. In total, this protective shield has meant a disbursement of public funds of around 35 billion euros since 2021, as shown by the data included in the stability program up to May last year. The largest item, with a total cost of 18 billion, is the reduction in energy taxes.
