The government is preparing a partial expansion of social protection to combat the consequences of inflation, the energy crisis and the war in Ukraine. This package expires on December 31st and includes tax breaks for energy, transport and sector aid. The extension will be approved almost spontaneously in the Council of Ministers, which will take place next Wednesday the 27th. The coalition government is still negotiating which of these measures and to what extent they will be included in the Royal Decree-Law, the duration which, according to the logic of the previous one, should be extended until June. In principle, consideration is being given to retaining in some form the subsidies for transport payments and at least part of the reductions in energy taxes, which have the greatest influence on prices. Although electricity costs fell significantly in December compared to last year and the future price curve discounts offers in wholesale markets similarly to 2019, the bill would increase if the tax cuts were eliminated, and that is exactly what is intended to be avoided.
According to government sources, Government Vice Presidents María Jesús Montero, Teresa Ribera, Nadia Calviño and Yolanda Díaz will work to finalize the draft on the same day, the 26th. President Pedro Sánchez will be the one who makes the final decisions. In any case, the idea is to modulate them so as to reduce their fiscal costs. The 2022 package already amounted to almost 22,000 million euros. And the year 2023 meant almost 15,000 million. This amount should also be reduced for next year, especially if in the same year the European fiscal rules, which require a reduction in the existing gap in public finances, come into force again and the economy is in crisis, beyond which a European slowdown will not to the same extent as in previous years.
Housing and Mortgages
Measures are more likely to continue without fiscal costs. This is the case with the eviction prevention procedures introduced during the pandemic for families whose economic situation is precarious and who have no possibility of finding alternative housing. Or the ban on laying off companies that received direct aid or an ERTE due to the war and the energy crisis. The income limit at which families can benefit from the mechanisms to cushion rising mortgage interest rates has already been raised from just under 30,000 euros to just under 38,000 euros. And President Sánchez also announced an increase in the rental bonus for young people to 250 euros.
Transport promotion initiatives, which also include the subscription subsidy, will be adjusted. The President has already announced that public transport will be free for minors, young people and the unemployed. And municipalities and city councils are waiting eagerly to see what they will do with the subscription reduction, because so far the state has paid 30% of the reduction and the responsible local authority has paid 20%. In the budget sent to Brussels, around 760 million euros are earmarked for 2024 for “subsidies paid by the state for urban and intercity transport: direct aid to CC AA and local authorities to reduce ticket prices for regular users”. In any case, the free Renfe service remains on the Media Distancia and Cercanías routes.
Industry subsidies such as the fuel bonus for transporters and farmers are likely to decline as prices are considered to have weakened and are no longer as necessary. The cost is considerable: 1,600 million. And the rest of the sectoral aid amounts to more than 2,000 million, according to the tax authority. These should be deleted. The electricity-intensive industry deserves a special mention. Although energy costs have been reduced, the sector is demanding some relief to avoid closures. And the Bank of Spain has found that the energy-dependent industry has suffered much more than the rest.
Tax costs
The debate within the coalition government focuses primarily on tax cuts, which entail significant fiscal costs. There are also concerns that the abolition of the funds will lead to a significant increase in inflation, as the Bank of Spain had already warned, and that there would also be an additional burden later in the revaluation of items such as pensions. For example, Funcas assumes that the increase in inflation is only due to the extraordinary measures to reduce energy prices at a certain point in time. For this reason, consideration is being given to maintaining the tax cuts that have a direct impact on the CPI, such as the VAT cut on electricity and gas, also in a phased form. Currently, VAT is reduced to 5%, excise tax to 0.5% and production tax is abolished. A reintroduction of the electricity generation tax is more likely, as it has a less direct impact on the price. According to the tax office, the total costs of these relief measures on energy bills amount to almost 7 billion euros. And according to knowledgeable sources, various proposals are on the table as to how the collection of these taxes can be staggered in terms of timing and intensity.
Another proposal on the table would be to freeze the price of bottles. And the reduction in VAT on basic foodstuffs will be maintained, as President Sánchez has explained. Foods such as bread, eggs, fruit and vegetables will continue to be subject to a 0% rate, while oil and pasta will continue to apply at a reduced rate of up to 5%.
With the next decree, the government will now add nine measures to counteract the effects of the price crisis. The logic was to prepare six-month packages to see how the economy and inflation developed. But this needs to be reconciled with a slowdown in the economy and the return of spending rules in Europe after the shocks of Covid and the war in Ukraine.
The government told Brussels that the total revenue of all administrations would increase by around 36 billion euros in 2024. However, only the Autonomous Communities will receive 20 billion euros from this increase. The city councils, about 5,000 million. Pensions, another 11,000 million. And items such as interest or unemployment benefits will increase after the reform. The scope is narrow. And the tax authority has already warned that due to the withdrawal of the measures, the public deficit will only fall next year and will be worth around 15 billion. That's why it's so important to remove them. At least part of it.
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