The Bank of Spain asks for VAT increase and decoupling of pensions from the CPI

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The agency demands an income pact not to fall into an inflation spiral and believes the fuel discount benefits the rich more

Runaway inflation across Europe, but especially in Spain (which reached 8.3% in April) could lead to “second-round effects” if companies start raising prices and wages so they don’t lose purchasing power. For this reason, the Bank of Spain in its 2021 Annual Report calls for an income agreement to “reduce this risk”.

And although negotiations between employers and unions broke down a few weeks ago due to the difficulty of reaching an agreement, the organization assures that this income pact is already being tacitly respected. In its report, it says companies have “very partially” passed on their cost increases to final product prices since early 2021, leading to a “decrease in operating margins.” At the same time, the agreed wage increases are “markedly below inflation”, which translates into a loss of purchasing power for the workers.

In this way, everyone would share the “inevitable loss of income” to the economy caused by the rise in the prices of imported commodities, but the inflation spiral would be avoided. The pact should avoid formulas to automatically update salaries to past inflation. In addition, the Bank of Spain is calling for a “multi-year” agreement and not just targeting 2022, which would allow the adjustments to be spread over time.

And this breakdown of the economic downturn should also include retirees, who for now will be the only group not to lose purchasing power this year by updating their payrolls with the CPI according to the recently passed reform. But the Bank of Spain points to the need for an automatic adjustment index in the style of the withdrawn IRP (which meant an annual increase of 0.25% until Social Security came out of the deficit) so that there would be a bigger forecast of pension expenditure .

Otherwise, the agency believes that “new actions on the side of revenue, expenditure, or both” will be needed to address the rise in pensions. It therefore considers that the current reform is insufficient. According to a Fedea study, the disbursement this year will be 1,700 million more when linked to the CPI, meaning a social security bill of 188,500 million euros, 14% of GDP, two points more than before the pandemic.

The organization states that the longer inflationary pressures persist, the more likely the second-round effects will be significant and economic costs will be higher, as companies do not want to lose margins indefinitely, nor lose the purchasing power of the citizens.

All this in order not to further increase the increased income inequality caused by the pandemic, especially among young people. For this reason, the body demands an improvement in education and an active employment policy for the ‘retraining’ of workers. With regard to the labor reform, the Bank warns that more time is needed to assess the measure, as the reduction in temporary contracts registered in April could be due to a net destruction of employment.

The economic impact is already becoming apparent and the Bank of Spain confirms that it will have to lower its economic growth forecast for 2022, currently at 4.5%, as the economy progressed less than expected in the first quarter (just one 0.1% compared with the 0.9% estimated by the Bank of Spain).

And it’s that private consumption is stagnating, it’s still 8% below pre-pandemic levels, compared to the 4% GDP left to recover from 2019 levels. And it is that households have barely used the savings bag they collected in 2020 due to incarceration, and the savings rate remains very high, especially in high-income households. On the contrary, in the most vulnerable households, the savings rate has been drastically reduced in 2021 because more has been paid for the increase in raw materials and energy.

To increase state collection, the Bank of Spain believes it is “necessary” to carry out a “comprehensive overhaul of the tax system”. One of his proposals is to increase the consumption tax (VAT), which, according to the latest data from Eurostat, has the largest collection gap vis-à-vis the EU, at almost one percentage point.

Agency sources explain that for better wealth redistribution, it is better to increase collection in consumption, although this is initially regressive, and the most vulnerable households are “compensated” in personal income taxes.

For example, she advocates bringing products with reduced and super-reduced VAT (10% and 4%) to the normal rate (21%), an idea that the Tax Authorities (Airef) has also supported from time to time.

But rising prices have an uneven effect on society, and households in the lower income percentile have to endure more than one point more inflation than those in the top percentile. The Bank of Spain report indicates that the indirect tax cuts approved in 2021 (electricity is taxed at 10% instead of 21%) have lowered average inflation more for lower-income households.

But the effect of the 20 cents per liter of fuel bonus, approved until June 30, is the opposite: headline inflation is reduced, but inflation supported by higher-income households is reduced more, which could be seen as a waste of resources. . From within the organization they believe that this help should be aimed more at more vulnerable groups.

Source: La Verdad

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