The Spanish government will progressively withdraw the tax reduction 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 businesses and citizens. Four months after the start of the conflict, inflation has fallen but not enough to withdraw all measures. Thus, the Spanish executive has decided to keep some of them in place for three more months. That is, until September 30. Once approved in a cabinet meeting, they must be validated by Congress.

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

Fiscal measures

From the outset, with the start of the holiday period and the so-called "operations exit" approaching, the Spanish government did not want to take risks with fuel prices, as the war had caused them to skyrocket due to the blockade of the Strait of Hormuz. Now, however, the VAT reduction on gasoline and diesel is being replaced by a reduction of 0.15 cents per liter on the Special Hydrocarbons Tax (IEH). For example, if approximately 0.35 cents per liter are currently paid for the special tax on general-use gasoline in Spain, a reduction of 0.15 cents will be applied this July.

This aid, however, will gradually disappear to adapt to the evolution of the energy market, as detailed by the First Deputy Prime Minister 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 it will disappear completely in October. However, the decree will include an "automatic clause" to reinstate the measure (it will be a bonus of 0.20 cents per liter) in case the conflict escalates again and prices skyrocket.

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 shelved. Furthermore, in the case of electricity, the special tax is returning to its usual rate (5.11%) and although the Tax on the Value of Electricity Production is being reinstated, the Spanish government has announced its progressive disappearance by 2028. This year it will be set at 5%; in 2027 at 3.5%, and it will be completely eliminated in 2028. This is a measure requested by large industry, but also by parties like the PP or Junts. "It is a signal so that the decree can be approved unanimously [in Congress]," Cuerpo acknowledged.

In terms of control, the price transparency mechanisms for gas stations are reinforced 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 will continue throughout the year with extraordinary discounts on the social electricity tariff – 42.5% for vulnerable and 57.5% for severely vulnerable – and the prohibition of cutting off water and energy for non-payment in households with 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 updates at 2% with the CPI. These measures, however, did not proceed due to rejection by Congress. This Monday, Pedro Sánchez's executive 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 VAT on tourist apartments to 21%, but also measures to "streamline" administrative procedures and "mobilize" the supply of flats. To "contain" prices and provide "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.