Brussels urges Spain to raise VAT on hospitality to tax higher incomes more

BrusselsNew warning from the European Commission to Spain. Although the State is the largest economy growing the most in the European Union, it complies with deficit limits and is reducing debt, Brussels warns that it may slightly exceed the net spending cap and urges it to increase revenue through value-added tax (VAT) on bars, restaurants, and hotels. Specifically, sources from the Community executive recommend that the VAT for the hospitality sector rise from 10% to 21%, which they calculate – with data from Airef for 2024 – represents approximately 7 billion euros annually and the equivalent of 0.4% of the State's gross domestic product (GDP).

For some time now, Brussels has been opposed to Spain having a reduced VAT in various sectors and asserts that it is an exception within the European Union. However, in the fiscal policy recommendations presented this Wednesday, the European Commission goes a step further and directly calls for "strengthening fiscal sustainability" and "limiting tax exemptions," which – as community sources clarify – means an increase in VAT for the hospitality sector.

Brussels considers that Spain depends too much on taxes levied on labor and points out that an increase in VAT on bars, restaurants, and hotels would, in practice, mean increasing the taxes paid by higher incomes, as they are the ones who spend more money on these services. And, with this increase in revenue, the Community executive believes that social policies could be implemented to reduce child poverty or, among other benefits, increase the stock of social housing.

In fact, to alleviate child poverty, the European Commission recommends for the first time that "social spending be rebalanced between generations," and sources from the Community executive find it unfair that, for example, many discounts and benefits are maintained for the elderly that are not offered to younger people, who are generally in a more precarious economic situation. In this regard, technical sources from the Community executive recall that Spain spends a lot on items such as pensions and that retirees already almost reach double the average income of the State's citizens.

On the other hand, Brussels also urges Spain to expand its housing stock and recommends that it review regulations to speed up licensing procedures, facilitate land availability, and renovate underutilized or dilapidated properties. In the same vein, the European Commission calls for an increase in the supply of affordable and social housing, especially for rental properties.

In fact, the Community executive recalls that Spain is one of the EU countries with the most social housing, which only accounts for 2% of the total, while the European average is 7%. According to Brussels, this low percentage of social housing contributes to the increase in prices of apartments and houses, and further exacerbates the housing crisis, which it warns is particularly felt in large cities, metropolitan areas, and tourist zones.

Fiscal margin for the energy transition

The President of the Spanish Government, Pedro Sánchez, and the Italian Prime Minister, Giorgia Meloni, are two of the main European leaders who requested more fiscal leeway from Brussels to face the energy crisis derived from the war in the Middle East. Although at first the President of the European Commission herself, Ursula von der Leyen, refused, Brussels accepted the demand this Wednesday and will allow member states to exceed the deficit ceiling – which is 3% – by three tenths this year, next year, and in 2028, in order to increase investments for the energy transition.

Both Spain and Italy were more ambitious with their proposal and requested that an exception be applied as the one that, for example, was carried out for the major rearmament of the European Union, in which member states can exceed the deficit ceiling by up to one and a half percentage points. Be that as it may, this is a fiscal margin that can allow Spain to comply again this year with fiscal rules in a very tight manner.

The State already complied with the fiscal rules in 2025 because it requested to apply the exception clause of the fiscal rules for military spending, and this 2026 Brussels warns that it could slightly exceed the net spending limit again, by 0.1%. However, the Spanish government could be saved again if the fiscal exceptions for the energy transition are approved and Moncloa requests to activate them.