The Bank of Spain asks to raise VAT and delink pensions from the CPI

L. Gomez

The agency demands an income pact so as not to fall into an inflationary spiral and considers that the fuel discount benefits the rich more

Edurne Martinez

The runaway inflation throughout Europe, but in particular in Spain (which reached 8.3% in April, the latest data available) may lead to "second-round effects" if companies begin to raise their prices and the wages of workers to that they do not lose purchasing power. For this reason, the Bank of Spain advocates in its 2021 Annual Report for an income agreement to "mitigate this risk".

And although the negotiation between employers and unions broke down a few weeks ago due to the difficulty of reaching an agreement, the organization assures that this income pact is already being tacitly fulfilled. In their report they find that companies have transferred their cost increases “very partially” to the final prices of products since the beginning of 2021, giving rise to a “decrease in business margins”. At the same time, the agreed wage increases are "clearly below the rate of inflation", which translates into a loss of purchasing power for workers.

In this way, everyone would share the "inevitable loss of income" for the economy that implies the increase in the prices of imported raw materials, but the inflationary spiral would be avoided. The pact should avoid formulas for automatically updating salaries to past inflation. In addition, the Bank of Spain advocates a "multi-year" agreement and not only focused on 2022, which would allow the adjustments to be distributed over time.

The agency indicates that the longer the inflationary pressure lasts, the greater the probability that the second-round effects will materialize significantly and the economic cost will be greater, since companies will not want to continue losing margins indefinitely, nor will the citizens purchasing power.

In fact, the economic impact is already becoming evident and the Bank of Spain confirms that it will have to lower its economic growth forecasts for 2022, currently at 4.5%, due to the fact that the economy advanced less than expected in the first quarter (only 0.1% compared to the 0.9% estimated by the Bank of Spain).

And it is that private consumption is stagnating, it is still 8% below pre-pandemic levels, compared to the 4% that GDP has left to recover the 2019 level. And it is that households have barely used the savings bag they accumulated in 2020 due to confinement, and the savings rate remains very high, especially in high-income households. On the contrary, in the most vulnerable families, the savings rate has been drastically reduced in 2021 because it has been used to pay more for the increase in raw materials and energy.

raise VAT

In order to increase State collection, the Bank of Spain considers that it is “necessary” to carry out a “comprehensive review of the tax system”. Among his proposals, raise consumption taxes (VAT), which is where the largest collection gap with respect to the EU is found, of almost one percentage point according to the latest Eurostat data.

Sources from the agency explain that in order to achieve a better redistribution of wealth, it is better to increase the collection of consumption, although at first it is regressive, and the most vulnerable households are “compensated” in personal income tax.

Thus, it advocates bringing products with reduced and super-reduced VAT (10% and 4%) to the normal rate (21%), an idea that the Tax Authority (Airef) has also supported on occasion.

Bonus on gasoline

But rising prices are having an uneven effect on society, and households in the bottom income percentile have endured more than one point more inflation than those in the higher percentile. The Bank of Spain report indicates that the indirect tax reductions approved in 2021 (electricity is taxed at 10% instead of 21%) have reduced average inflation more for households with lower income.

But the effect of the bonus of 20 cents per liter of fuel approved until June 30 is the opposite: general inflation is reduced, but that supported by higher-income households is reduced more intensely, which could be considered waste of resources. From the organization they consider that this aid should be more focused to favor more vulnerable groups.

pensions

And regarding the updating of pensions in accordance with the recently approved CPI, the Bank of Spain assures that in order to deal with the increases in spending, it will require "new actions on the side of income, expenses or both". The institution points to the need for an automatic adjustment index in the style of the repealed IRP (which meant an annual rise of 0.25% until Social Security came out of the deficit) so that there would be a greater forecast of pension spending.

According to a Fedea study, pension spending this year will be 188.5 billion due to the rise in inflation, 14% of GDP, two points more than before the pandemic. Inflation will cause Social Security to disburse some 1,700 million euros more this year to guarantee that the purchasing power of pensioners is maintained.

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