The Spanish economy is on a path full of uncertainties. The war in Ukraine, the energy crisis, the specter of inflation and the foreseeable withdrawal of monetary stimuli starting in the summer threaten to slow down the pace of recovery. But behind these clouds other factors appear that allow us to face the future with a little more confidence. This has been communicated by the Government to the European Commission in the 2022-2025 Stability Program, a sort of compass for Spanish economic policy for the coming years. In the document sent last Friday, the Executive calculates that it will enter nearly 80,000 million more between 2021 and 2023 without adopting significant tax increases. This increase with respect to 2020 is the vault key on which he builds his accounts: thus he manages to lower the deficit without raising taxes while increasing disbursements. That yes, the cost always grows less than the collection. In this way, as reported to Brussels, it will manage to clean up the public accounts without adjustments. These projections do not even include the tax reform, which contemplates strong increases in green and regional taxation and which is committed to Brussels in exchange for European funds for the first quarter of 2023.
Even with this improvement in tax revenue, the gap in public accounts will continue to be high. In 2023 it will still be at 3.9% of GDP, a figure that is equivalent to almost half of what is earned by personal income tax.
Tax revenue from all Administrations amounted to 295,770 million at the end of 2021. This amount already represented an increase of almost 40,000 million compared to the previous year affected by the pandemic. And it goes far beyond the economic rebound. Last year the box grew twice as much as the economy adding inflation. Although activity had not recovered, revenues exceeded pre-pandemic records, setting a record. Among the reasons given: that the economy has actually done better than the official statistics reflect; rampant inflation raising VAT revenues that took off in mid-2021; the emergence of the underground economy due to the greater use of cards and the incentive of citizens to declare their income in order to collect public aid from the covid; the good behavior of employment and the maintenance of income thanks to the ERTE and the subsidy for the self-employed; the increase in public payrolls, which provides more income, and the rapid recovery of corporate tax by releasing provisions and due to banking mergers.
“The forecast of taxes, which will reach 317,657 million euros in 2022, entails a dynamic growth of 7.4%”, explains the Executive to the European Commission in the document. “This is explained by the rebound in economic activity and this despite the tax measures introduced to mitigate the escalation in energy prices that have had a negative effect on the expected collection of taxes on production and imports, since the tax reductions will be maintained until June 30”.
By 2023, the Government expects a total of 335,819 million euros, which is 31% more in three years, as reflected in the stability program. At the end of the period, in 2025, it predicts that tax revenues will reach 361,261 million.
He knows in depth all the sides of the coin.
The goal of raising 80,000 million more between 2021 and 2023 seems ambitious but not unattainable. It is already half way done because last year it entered some 40,000 million more, almost double the increase that it had foreseen in the Budgets. And this year the collection advances until March at the highest rate of the historical series of the Tax Agency, 20.2% during the first quarter. “VAT collection is the main cause of revenue growth, explaining almost half of the rate for the quarter. Job retentions, which are growing at a high rate, and Corporation Tax, with a drop in returns made, are the other two figures that have a significant contribution to the increase”, explains the Agency in its latest report.
Inflation is the best fuel for VAT collection. And Spain suffers the biggest price increases in almost 40 years. The VAT tax is applied to the increased price of the products, triggering tax revenues.
And this dazzling rise in income is being achieved without raising taxes. In the net, due to tax reductions in light, the Fiscal Authority calculates that the Government is lowering taxes this year by 2,300 million.
In this way, disbursements from all the Administrations that are rising strongly can be endured. In 2021, after the large budget increase that was recorded by covid, they increased by about 29,000 million, despite the fact that payments related to the pandemic fell by 8,000 million. And in 2023 social benefits will have a strong increase of almost 8% due mainly to the revaluation of pensions with the 2022 CPI. To maintain this spending structure, it will be necessary for collection to maintain the levels that have been achieved so far and that it does not suffer too much from the weakening of the economy due to the price crisis aggravated by the war and, later, by an increase in the cost of financing that the ECB puts in place to placate price increases.
The Government calculates two more points of GDP for the labor reform
The Government has estimated how much the Spanish economy can earn from the structural reforms that it is approving and that it has committed to with Brussels in exchange for European funds. According to his calculations sent to the Commission in the Stability Program, the set of reforms planned will raise the gross domestic product (GDP) by about three points until 2025. The main reform would be the labor reform, which would contribute more than any with 2.1 additional GDP points.
“The main transmission channels would be the reduction of duality together with an increase in flexibility, which would allow a better adjustment to future crises and the consequent reduction in structural unemployment. Additionally, the reform of active employment policies would also reduce structural unemployment, favoring the matching between vacancies and the unemployed, as well as an increase in productivity”, the Government assures in the document.
In fact, the new ERTE, baptized as the RED Mechanism, will provide a reduction in structural unemployment by some 280,000 workers and a reduction in the structural deficit of some 3,870 million, about three tenths of GDP.
Such calculations make it possible to increase the potential growth of the Spanish economy and, therefore, reduce the structural public deficit, now calculated by the Government in the text published on Friday at around 3% of GDP, well below the estimates of the Fiscal Authority and the Bank of Spain, which place it at around 4.5% of GDP.
The Create and Grow law would add two tenths more to GDP; the new FP law and the digital skills plan, six tenths, and the roadmap for energy self-consumption and green hydrogen, another two tenths.
Despite having already approved a first block of the pension reform, the Government avoids making a long-term projection of its impact. It does include the rise in the CPI between 2021 and 2025, with a strong impact on the 2023 accounts. But it does not include it in the long-term projections, arguing that the European report, the Aging Report of 2021, it does not. However, this publication does give figures on how much it would cost to raise pensions with the CPI and eliminate the sustainability factor approved by the PP: the level of spending on pensions would increase by 4.2 points of GDP in 2050.
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