The boom in public revenue since the pandemic has raised doubts among all analysts as to why this is happening. Rising inflation explains part, particularly taxes such as VAT, and the recovery of the economy after the health crisis, the other part. However, there is an opinion that there is a part that is not fully explained. These are what the Bank of Spain report calls “unexplained components” and which have accounted for more than a third of the rise in collections over the past two years.
A technical analysis published by the Bank of Spain seeks to explain the sharp rise in tax collections since the pandemic, an issue that has raised many questions in recent months. In the face of quick explanations given in the political arena, such as information generated by inflation, economic events also played an important role.
“From the analysis carried out, it was concluded that the two most important factors behind the strong growth of public revenues in Spain after the COVID-19 pandemic are inflation and the unexplained or residual component,” the Bank of Spain said in a document. Presented on Monday. “It is estimated that price increases can explain about 46% of the increase in government revenues since the pandemic,” he notes.
What stands out, however, is the assessment it gives of “unexplained” factors. They are those that do not find justification in the usual behavior of analyzed taxes, the evolution of the economy, the rise of rates or the rise of prices. These unexplained factors have always existed, but their role has multiplied since the pandemic.
The Bank of Spain is not going to explain the possible reason for this increase in unexplained factors. However, among the reasons that have been theorized in recent months are aspects such as the emergence of an underground economy following the implementation of support measures during the economic crisis. Other experts also suggest that the INE’s calculation of the evolution of GDP in Spain will not adequately assess the economic improvement after the pandemic, as explained by Francisco Melis and Miguel Artola in this media.
In fact, the Bank of Spain indicates an increase in the weight of tax revenue on GDP compared to the pre-pandemic period. This is what is known as fiscal pressure. “The high dynamism of public revenues in Spain led to an increase in its weight as a percentage of GDP by 3.7 percentage points from 2019,” the supervisor’s report said. “Probably, 2.6 percentage points of the 3.7 percent increase in the income-to-GDP ratio over the past three years cannot be explained by economic activity,” he notes, showing the relevance of these unexplained factors.
The Bank of Spain itself urges “caution” when analyzing this data due to the “difficulty” of estimating these unexplained factors. In addition, he notes that “given the quantitative relevance of this fiscal waste, it would be desirable to look for a verifiable explanation that would allow us to understand to what extent it is a structural (permanent) or transitory increase in public revenues.” In this case, a reversal of the strong growth of collections is expected in the coming years.” “The principle of prudence suggests that we should not consider the unexplained part of the recent increase in public revenues as permanent,” he emphasizes.
As for inflation, the Bank of Spain reports that part of the impact of price increases on inflation is not immediate and will begin to increase in the coming months. “For the current year, the contribution of inflation to VAT is expected to be lower as a result of the expected slowdown in prices,” he notes about indirect taxes, which are the fastest acting. “However, it is likely that the impact on personal income tax and CCSS will increase to the extent that there is some acceleration in wage growth and the indexation of pensions to the previous year’s inflation,” he adds.
At the moment, year-end tax collection details are not known, so the Bank of Spain takes data up to September as a reference. During this period, he explains, “price growth was recorded at 7.3 percentage points from 12.3 percentage points of public revenues.”
Source: El Diario
