Negative impacts from new taxes on the energy and banking sectors

The Institute of Economic Studies (IEE), in its latest report from July 2022, assesing the Spanish economic situation, includes an analysis of the reality of business profits and the risks introduced by the new tax increases based on the concept “windfall profits” of the energy and banking sectors. According to the IEE, the new measure is ineffective because it will not help curb inflation, inefficient because it will have negative consequences for the economy as a whole, greater than what it plans to collect, and it does not address the economic reality in Spain, where business profits, including financial sector, continue in a normalization process.

Main takeaways:

• Negative impacts on the economy due to the increase in taxes on the energy and financial sectors:

- Destruction of almost 72,000 jobs (of which 35,000 related to the financial sector) and 4 basic points of GDP (half related to the financial sector) in each of the two years that the increase will be in force.

- These impacts would include the negative effects in the short and medium term and the direct and indirect impacts due to the carry-over effect on the rest of the economy.

• The main beneficiary of the inflationary process is the public sector, so it makes no sense to introduce even more cost pressures on companies: With the same tax rates, the government is increasing its fiscal revenues to record levels:

- Fiscal revenues, in terms of GDP, have increased from 39.3% in 2019 to 41% at the end of 2021; that is, an increase in tax pressure of almost two points.

- In the first months of 2022, record tax revenues levels have been registered, with an increase in the accumulated until May of 27.7% compared to the same period in 2019.

• The normalization of corporate´s profits in Spain is the most delayed in all of Europe: while many countries have already far exceeded the nominal GDP levels for 2019, in Spain we are still below -3.2%. According to the IEE, what must be done is to favour the normalization of corporate´s profits, which at the end of 2021 have not yet recovered the levels prior to the pandemic crisis (they are 51% below the end of 2019 and almost a third of of the corporates in the country still recording losses).