Two apparently unrelated events have been concatenated in recent days. On Sunday, the Andalusian elections brought an unprecedented result in the history of the autonomous community: an absolute majority for the Popular Party. Today the Government of Spain, controlled by the PSOE, historical dominator of Andalusian politics, has announced a somewhat surprising measure: the reduction of VAT on electricity to 5%.
The link. Correlation does not always imply causation, but in this case we can allow ourselves the benefit of the doubt. Especially for the time spent. A few months ago, Teresa Ribera, Minister for the Ecological Transition, rejected a proposal from the PP to lower VAT on electricity bills to 5%. According to Ribera, it was a “cosmetic measure” and “insufficient” that would have no real effect on the bill in the medium term.
Other tools were needed.
The backup. In April, the European Commission had already agreed with Ribera. “The reduction of indirect taxation is not necessarily the most effective solution to address the affordability of energy, especially if high prices persist,” explained Paolo Gentiloni, the European Commissioner for the Economy. Gentiloni only underlined the official position of Brussels on energy policy. Lowering taxes did not contribute to any of his stated objectives.
“VAT rate cuts, in particular, have a poor track record of translating into low prices for consumers, as tax cuts may be offset by higher rates from energy providers.” , added the Italian commissioner. Something we have experienced with gasoline.
But the elections. Regressive, a patch, insufficient. The arguments put forward by the Government could be very coherent, but they have been lost like tears in the rain once the Andalusian elections have imposed their law. The retreat of the PSOE (30 seats and barely 24% of the votes, an unprecedented minimum), the rise of the conservative bloc, the economic situation and the polls do not predict very optimistic scenarios in some hypothetical generals. It was time to move tab.
The top. And the truth is that the Government does not have much room for maneuver to alleviate a situation that has raised the cost of living for Spaniards by 9% year-on-year. The introduction of the gas price cap, extraordinarily approved by Brussels for Spain and Portugal, has coincided with a rebound in the European wholesale market. In practice, and despite the fact that the limitation has had an effect on the bill, its impact has been less profound than desirable.
From patch to patch. With no practical possibility of undertaking immediate structural reforms to alleviate Spain’s dependence on gas, which is still high despite the rise in renewables, the Government needs urgent measures. Measures that have an effect on the daily life of a voter plunged into another historic economic crisis. Taxes, VAT, is the straightest path to the electoral battle, as is the 20/cent fuel subsidy.
They may not be very effective measures, nor may they change a situation for which Spain is exposed to the international context. But they do serve the electoral narrative. One that will only gain weight from here until the next elections are held.
Image: Jesus Briones/GTRES