La sagrada familia in Spain

Spain Fiscal October 2020

Spain: Government sets out expansionary 2021 budget to boost fragile recovery after Covid-19 shock

On 15 October, the government sent its 2021 draft budget to the European Commission for review. The expansionary plan includes the use of EU coronavirus recovery funds and aims to help the economy rebound from the unprecedented blow dealt by the Covid-19 pandemic. Notably, the package contemplates new and higher taxes, and envisages a fiscal deficit of 7.7% of GDP, down from the 11.3% expected for this year and slightly larger than our Consensus’ 7.4% estimate. The minority center-left coalition government is currently trying to secure backing from other parties to pass the plan, which, if successful, will be the first full-year budget to be approved since 2016 amid prolonged political gridlock that has led to budgets being rolled over one year to the next.

The budget encompasses a massive 53.7% increase in this year’s spending ceiling to EUR 196 billion—incorporating around EUR 27 billion in EU recovery funds. Meanwhile, in the face of shrinking tax revenues combined with extraordinary transfers to regional governments and social security to continue mitigating the impact of the health crisis, the budget proposes a set of new and enhanced revenue-raising measures. These include a 0.2% tax on transactions of shares in Spanish companies with a market cap of over EUR 1.0 billion, a 3.0% tax on digital services provided locally by large tech firms, and various “green” taxes such as on single-use plastic containers. The government also laid down a VAT hike on sugary drinks from 10% to 21%; an increase in direct taxes, possibly on high-income households; and stronger tax enforcement. As a whole, these proposals would collect about EUR 6.8 billion, which, coupled with an expected 7.2% GDP growth rate, would bring the projected increase in revenues to EUR 33.4 billion.

Overall, the expansionary budget should help the economy cope with the lingering effects of the pandemic, which have been accentuated recently by a new surge in infections and rendered the recovery even more fragile. The approval of the EUR 27 billion of EU recovery funds is thus also crucial in this regard, as they are part of the government’s EUR 72 billion public investment plan for 2021–2023 that should provide a further boost to economic activity. Spain is one of the main beneficiaries of the deal approved by EU leaders in July, potentially receiving as much as EUR 140 billion in grants and loans over the next six years. Tough negotiations with other parliamentary groups abound, with approval of the budget expected for December this year or January 2021.

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