The Independent Authority for Fiscal Responsibility (Airef) calculates that the reduction of VAT on electricity from 21% to 10% will have an impact on public accounts of between 1,100 and 1,300 million euros per year and another 1,000 million less per year if it is suspended the tax on electricity generation. Together, the effect of the two measures in the remainder of this year would be just under € 1 billion.
This has been advanced by the president of the organization, Cristina Herrero, during her speech at the seminar The economics of the pandemic, organized by APIE and BBVA at the Menéndez Pelayo International University (UIMP) in Santander, a day after the Government announced that it will approve a decree law next Thursday to reduce the tax burden applied to the supply of electricity, such as reducing the VAT rate from the current 21% up to 10%. “The direct fall in collection would be 1,300 million, but the cost of electricity could rise due to the lower price, which would remain at 1,100 million in one year,” Herrero clarified.
The impact of the proposal to temporarily suspend, for three months, the 7% tax on electricity production, a measure that was already adopted in 2018 in the face of an escalation in electricity prices in the wholesale market, would be 1,000 million of additional annual euros. However, Herrero clarified: “It would enter as income, but it is also an expense that will compensate for the tariff deficit, with which there the incidence in deficit would not occur”, he explained.
“Does not compromise sustainability”
Although Herrero has acknowledged that it is “a bit premature” to assess the impact of this measure on public accounts, asked if there is room for this loss of revenue, the president of AIReF recalled that the body does not pronounce on the measures that adopted by the Government, but it is up to it to indicate the impact that these will have on public accounts.
In addition, Herrero has highlighted that it is a provisional measure and that “temporary status, in principle, does not have to compromise budget sustainability. When one talks about the sustainability of public accounts, one is always talking about a medium-term measure and we would be more concerned with the entry of a structural expenditure, which is what we always say to watch: a structural expenditure measure would require a compensation measure ”, explained the president of Airef.
On the other hand, the president of the organization insisted on the need to design a medium-term fiscal strategy to redirect the debt to a less vulnerable position. “If rates were to rise by one point, that would mean raising spending on debt repayment by 15,000 million euros, which is higher than the minimum vital income, for example.” Herrero warned that, in the event that the European Central Bank stopped buying the debt at the same level that it is doing now, Spanish issues could become more expensive, “although it is something that is not on the horizon now.”
From the Airef it was claimed that the fiscal strategy involves all Public Administrations, taking into account their debt and their fiscal risks, with a wide time horizon and integrating into it the macroeconomic and fiscal implications of the implementation of the investments.
This fiscal strategy, according to Herrero, should detail the fiscal objectives and schedules; be based on realistic forecasts; propose a sufficient fiscal horizon to ensure sustainability; include details of the cost of the measures; incorporate possible policies to be applied in contingent scenarios and specify objectives on the quality of the fiscal governance framework. The president of the organization demanded that the government that the reforms and investments contemplated fit with fiscal planning and that their impact on public accounts be known.
Lack of precision in plans
“Both plans should have gone hand in hand and that has not occurred,” said Herrero, highlighting that “the only reference” contemplated in the plan is that it will have an impact of two points on GDP and 0.4% on potential growth, and job creation estimated at 800,000 jobs. “There is no more specific reference to effects in the Recovery Plan,” he said.
In this sense, it has pointed out that the update of the Stability Program contemplates some forecasts “in an imprecise way. Faced with this, he stressed that this need “has been understood by some European countries”, in order to accompany the multi-year fiscal plan with the pacing of the reforms planned as of 2024.
The president of the Airef asked that “the great milestones be set to provide confidence and security to the large economic agents” and thus “know what is the framework in which their activity is going to be set in the medium and long term”, with the cost of the measures and specific objectives to improve the quality of a governance framework, in the face of an institutional framework, he said, “clearly can be improved”.
Finally, Herrero pointed out that the autonomous communities will have to face the return of some 3,000 million in 2022 due to the negative settlement of the resources received by the central Administration in 2020. The payments on account were maintained based on a GDP growth of 1, 6%, without updating to the new scenario caused by the pandemic. This situation already occurred with the financial crisis of 2008, and an agreement was reached to delay the repayment in time to avoid a blow to the accounts of regional governments.
Herrero has said that the organism’s calculations go through a negative liquidation of around three tenths of GDP, approximately. Communities face a hole of almost two points of GDP, 1.7%.