The Spanish government will progressively withdraw the tax cut on fuels

MadridThe outbreak of war in Iran and the consequent increase in prices, particularly energy prices, led the government of Pedro Sánchez to approve a package of measures to alleviate the economic effects on companies and citizens. Four months after the start of the conflict, inflation has decreased, but not enough to withdraw all measures. Thus, the Spanish executive has decided to keep some of them active for three more months. That is, until September 30. Once approved in the Council of Ministers, they must be validated by Congress.

The new royal decree-law approved this Monday includes temporary fiscal measures in the energy sector, but also structural measures to continue promoting the energy transition. All of them will come into force this July 1. The cost of all of them amounts to 1,825 million euros, according to government calculations.

Fiscal measures

Initially, at the gates of the start of the holiday period and the so-called departure operations, the Spanish government did not want to take risks with fuel prices, which the war sent soaring due to the blockade of the Strait of Hormuz. Now, however, the VAT reduction on gasoline and diesel is replaced by a reduction of 0.15 cents per liter in the special hydrocarbon tax (IEH). For example, if on general-use gasoline in Spain approximately 0.35 cents per liter are currently paid for this special tax, this July a reduction of 0.15 cents will be applied.

This aid, however, will disappear progressively to adapt to the evolution of the energy market, as detailed by the first vice-president and Minister of Economy, Carlos Cuerpo, at a press conference this Monday. Thus, the tax reduction will be 0.10 cents in August, 0.05 cents in September, and will disappear completely in October. However, the decree will include an "automatic clause" to recover the measure (it will be a bonus of 0.20 cents per liter) in case the conflict escalates again and prices soar.

This modification of one of the flagship fiscal measures approved so far responds to a warning from Brussels. The European executive warned the Spanish government that reducing VAT on fuels goes against Community rules. Therefore, it has now opted to adjust the IEH.

For professional transporters and the agri-food sector, direct aid of 0.20 cents per liter is maintained for the purchase of fuels – it will be paid directly through the Tax Agency. 165 million euros will also be allocated for the purchase of fertilizers by farmers.

The VAT reduction on electricity bills and the reduction on natural gas are completely buried. Furthermore, in the case of electricity, the special tax recovers the usual rate (5.11%) and although the Tax on the Value of Electricity Production is recovered, the Spanish government has announced its progressive disappearance in 2028. This year it will be set at 5%; in 2027 at 3.5%, and in 2028 it will be completely eliminated. This is a measure requested by large industry, but also by parties such as the PP or Junts. "It is a signal so that the decree can be approved unanimously [in Congress]," Cuerpo acknowledged.

In terms of control, price transparency mechanisms for petrol stations are strengthened and the National Commission of Markets and Competition (CNMC) is given more power. For example, it will be able to publish a list of establishments that exhibit "anomalous" behaviors.

Vulnerable consumers

Aid for vulnerable consumers with extraordinary discounts on the social electricity tariff – 42.5% for vulnerable and 57.5% for severely vulnerable – will continue in force throughout the year, as will the prohibition of cutting off water and energy due to non-payment for households facing the greatest difficulties.

Housing

At the time, the Spanish government approved a second royal decree-law with housing measures which, among other things, proposed extending by two years rental contracts that were expiring this year and capping rent increases at 2% with the CPI. These measures, however, did not progress due to rejection by Congress. This Monday, Pedro Sánchez's executive has announced that it will re-approve a package of similar measures throughout this July, although it has not specified when.

This new decree, agreed between PSOE and Sumar, will include an increase in the VAT on tourist apartments to 21%, but also measures to "streamline" administrative procedures and "mobilize" the supply of apartments. To "contain" prices and bring "stability" to rents, the government is reinstating the regulation of seasonal and room rentals, the extraordinary extension of expiring contracts (this was requested by Sumar, the minority partner), and IRPF bonuses for landlords who lower rental prices. Some of these proposals, however, are currently blocked in Congress, where they are being processed through other channels.