VAT reduction on fuels and extension of rental contracts: Sánchez's social safety net during the war

MadridAfter an unprecedented clash with the Sumar coalition ministers over the emergency plan to combat the war in Iran, Spanish Prime Minister Pedro Sánchez appeared at Moncloa Palace this Friday to explain a new social safety net, which he described as the "largest" in all of Europe. It will have two components: a package of tax cuts on fuel, gas, and electricity; and a decree-law on housing extending rental contracts for up to two years. He stated that, in total, there will be 80 measures costing the public coffers 5 billion euros, primarily due to the reduction in the tax burden. "Spain is better prepared than other countries to face the energy shock resulting from Iran's illegal war," he asserted, referring to his strategic commitment, he said, to renewable energy, without hiding his "anger at the state of the world."

Sánchez appeared two hours later than scheduled due to disagreements with the Sumar coalition. In an unprecedented move, the ministers led by Yolanda Díaz refused to attend the cabinet meeting because they disagreed with the content of the emergency plan. The Socialists prioritized a minimal decree-law that did not include housing measures and which is destined to fail in the Congress of Deputies due to opposition from Junts—it is scheduled for a vote next week in Congress—but Sumar stood firm and demanded the approval of the extension of rental contracts. When asked about this issue, the Spanish president downplayed the disagreement. "It's just gossip," he asserted. "Some cabinet meetings last longer than others," he added, simply stating that they are a government of "dialogue." For its part, Sumar has assured that the coalition has never been in danger and, in the words of Minister Ernest Urtasun, it is "logical" that negotiations are prolonged when there is no agreement.

The content of the decree laws

60% reduction in the price of electricity

In the first royal decree-law, there will be a "drastic" reduction in energy taxes, which will entail a 60% reduction in the price of electricity. On the one hand, the VAT on electricity and gas—including pellets and firewood—will be reduced to 10%, and the tax on energy production will be temporarily eliminated, while the special tax will be lowered from 5.5% to 0.5%. VAT will also be reduced for gasoline and diesel, which, according to the Prime Minister's office, will mean a reduction of about 30 cents per liter when filling up. For the agri-food sector, there will be an additional direct subsidy of 20 cents per liter for the purchase of fuels and fertilizers; while an 80% discount on electricity tolls will be approved for energy-intensive industries.

At the same time, subsidies for utilities are being reinstated—extended until 2026—and electricity cutoffs for non-payment are prohibited for the most vulnerable. Simultaneously, the National Markets and Competition Commission is increasing controls to prevent companies from exploiting the situation for profit. From a structural perspective, to further decarbonize the economy, Sánchez also announced substantial income tax deductions for the installation of solar panels, heat pumps, and charging points, as well as subsidies to improve the energy efficiency of buildings.

All these measures are likely to pass in the Congress of Deputies, since the tax reduction was already a proposal from Junts. However, at the last minute, taxes on business profit margins have also been included at the insistence of Sumar, a measure whose support for Junts and the PNB remains to be seen.

Dwelling

Sánchez has also announced a second decree law that includes the extension of rental contracts until 2027. The Spanish president himself admitted that there is no parliamentary majority for it to pass, but asserted that this will not cause the government to abandon its efforts to approve these measures. It was precisely the issue of housing that sparked the clash with Sumar.

The coalition partners negotiated a last-minute package to address the consequences of the conflict in the Middle East. The clash was unprecedented: although the extraordinary cabinet meeting was scheduled to begin at 9:30 a.m., it didn't start until noon because the Sumar ministers refused to attend. They finally reached an agreement to divide the emergency plan into two separate decrees, at least to avoid its complete failure from the outset.

As this newspaper explained yesterdayIt was clear that the emergency plan would include VAT cuts on fuel and electricity to appease Junts, but the Socialists were reluctant to include housing-related measures, as demanded by Sumar, because they lack the necessary support in parliament. Both Junts and the PNV have warned the PSOE that they will not endorse the extension of rent payments, which Sumar boasts of having approved. Second Vice President Yolanda Díaz celebrated on Bluesky: "That's what we're in government for." Health Minister Mónica García echoed this sentiment, despite not having guaranteed support in Congress.

Throughout the week, the Socialists had already signaled their intention to prioritize consensus over a sweeping decree law that would be passed in the Spanish Parliament next week. In other words, they aimed to secure the support of the plurinational majority with minimal measures, while avoiding those that could jeopardize the approval of the emergency plan. This strategy also sought to put pressure on the People's Party (PP), making it difficult for them to justify voting against it.

Sumar, on the other hand, saw it differently: he demands to take advantage of the opportunity to incorporate the suspension of evictions and the extension of rentals that expire this year (some sources point to two years) and put Junts and the PNB between a rock and a hard place.

The priority of the emergency plan

The Spanish government has placed great importance on the approval of this package of measures, to the point that Pedro Sánchez has justified the delay in presenting the budget, which has been extended for three years, by prioritizing this decree-law to mitigate the effects of the war. The fact that there is no consensus even within the government on what to do has once again put Pedro Sánchez in a bind, although he maintained this Friday that he will present this year's budget later. "This would bring down the government of any democratic country," tweeted Ester Muñoz, the Popular Party's spokesperson in Congress. The Popular Party's general secretary, Miguel Tellado, said that what happened at Moncloa Palace was "worthy of the Big Brother house" and demanded the immediate calling of new elections. He has already announced that they will vote against the housing decree-law and that they will analyze the other one "in depth," since it includes tax cuts that the Popular Party itself had proposed.