The temptation to keep the VAT reduction in the light in 2024: it would lower inflation to 2.3%, raise GDP, but anger Brussels
After toasting the new year and facing the January slope, Spanish households will find an unpleasant surprise at the start of 2024. Unless the Government remedies it in extremis, the electricity and gas bill will register a significant increase by declining the tax reduction that has allowed these two sources of energy to become cheaper during the most acute moments of the crisis arising from the war in Ukraine. In a context of economic slowdown and with the threat of a rebound in inflation that would lead to the end of the tax reduction, the temptation to maintain part of that support can be great. Especially if you take into account the favorable effects it would bring in the short term.
In this sense, the Bank of Spain estimates that extending the VAT reduction on electricity and gas to all of 2024 (currently it is at 5%) would reduce inflation by one percentage point and increase the economic growth expected for next year by two tenths.. On the other hand, maintaining the relief would imply an impact of 3,000 million euros on public accounts in a year in which the fiscal rigor of the European Union will return. Translated into more concrete figures, maintaining the reduction in energy VAT next year would cause inflation in 2024 to be reduced from the 3.3% expected by the institution in 2024 to 2.3%, while the economy would grow by 1. 8% and not 1.6% as the banking supervisor expects.
The Bank of Spain assumes that the end of energy support will cause a slight rise in inflation in the first part of the year, which will then subside starting in the summer.. In addition to the reduction in energy VAT, the reduction in the special electricity tax (currently reduced to the legal minimum of 0.5%) and the tax on electricity generation paid by companies, currently suspended, are also expected to decline.. Another measure that will no longer be in force is the Iberian mechanism to lower the price of wholesale electricity, which the Government has ruled out extending.
Maintaining tax cuts for energy would help reinforce the recovery of purchasing power that has occurred after wage increases and the drop in inflation throughout this year. A movement that could boost growth in a year that seems uncertain with a euro economy that has been stagnant for twelve months.
Opposition in Brussels and rebound effect
However, extending the VAT tax reduction has important drawbacks and several of them pass through Brussels.. Firstly, because the European Commission has explicitly asked all Member States to withdraw the energy support measures they have in force. A call that has not been heeded by countries such as France or Germany, which have already announced that they will maintain energy subsidies also in 2024, which has caused the Commission to question their budget plans.. Furthermore, it is difficult to justify maintaining these tax cuts with prices in wholesale energy markets increasingly distant from the wild peaks reached during 2021 and 2022.
And, secondly, because the fiscal margin that Spain has to adopt new support measures – whatever their nature – is very limited.. The budget plan that the Executive presented to Brussels in November reflected that the only way for Spain to meet the 3% deficit target set for 2024 was to withdraw all support measures that expire on December 31.
Furthermore, we must bear in mind that maintaining the tax reduction on electricity and gas is bread for today and hunger for tomorrow.. The favorable effects it has on inflation in the short term are reversed in the medium term.. If the withdrawal of energy relief were delayed to 2025, there would be a rebound effect on prices that would be noticeable in that year.. Therefore, the final balance on prices is neutral.
The Government has just ten days left to decide what to do with the bulk of the package of anti-crisis measures that has been in force this year.. The Executive has already confirmed that it will maintain the VAT reduction on certain basic foods and free public transport also in 2024, but, if nothing remedies it, the rest of the measures will decline on December 31. However, he has an ace up his sleeve.. The Minister of Finance, María Jesús Montero, has made it clear that they still see budgetary room to incorporate or extend some more measures than those already known.. Various ministers say that the decision on an eventual extension will be taken next week, although they have not revealed the content of the measures that are being studied to extend.