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The new reduction of VAT on electricity contradicts the recommendations of experts and the European Commission

The new reduction in VAT on electricity announced by Pedro Sanchez this Wednesday runs counter to expert recommendations, runs counter to European Commission prescriptions and meets PP requirements. The executive, which was denied two weeks ago, argues that it is “appropriate to take additional measures” to protect the tax cuts, allowing for small savings on the bill before the energy crisis worsens.

The announced drop will in principle take effect within three months. This is part of a royal decree-law that plans to be approved by the Extraordinary Council of Ministers next Saturday to fight inflation. The reduction will reach the maximum allowed by the April 5 directive, which sets the minimum electricity VAT at 5%, compared to 4% of the super-reduced rate.

This event follows the popular victory in the regional elections last week and the premiere of the so-called Iberian solution, with slightly lower savings than expected. Intends to increase by 10% a year ago (when electricity prices started to spiral out of control) up to 10% compared to the current 21% for a customer with a contract.

Waiting to see if this energy demand will be sustained, Francisco Valverde, consultant and director of renewable energy at Menta Energía, estimates that the measure will result in a reduction in the income of average families of around € 4.5-5. The assessment for this month of June.

The measure adds to the tax generator suspension and the reduction of the special electricity tax to a minimum (0.5%). The Ministry of Finance estimates it will cost between $ 200 million and $ 400 million a quarter. If we take into account the 21% of the previous type, the decrease in collection increases to about 600 million per quarter. The cuts reach $ 1,800 million in the quarter, with the rest of the tax cuts on the bill.

For example, compared to motor fuel, it is legally possible to reduce electricity VAT at the European level, but in many countries around us, tariffs are higher than 5%. Spain intends to position itself as an EU country that uses a lower rate with Malta. In France it is 5.5%, but only in the fixed part (in the variable, depending on consumption, 20% is used). 6% in Greece; 10% in Italy; In Portugal 13% in the variable part (and for consumption up to 100 kWh; the rest is subject to a total rate of 23%); In Germany 19%.

This is a reduction that PP has been asking for for months, though it has become popular to ask for a rate of 4%, which the European directive does not allow. “Given the economic and social situation, the evolution of inflation, the prospects for ending the conflict and energy prices, among other considerations, the government considers it appropriate to take additional measures, including this one,” he explained. The executive branch, which indicates that “it measures its time and proposals based on the development of the economy,” informs. Rodrigo Ponce de Leon.

Two weeks ago, a third vice president, Teresa Ribera, denied the cuts were “cosmetic” or “inadequate”. But the person in charge of the treasury, Maria Jesus Montero, is now defending that “undoubtedly” it will make the receipt cheaper. Prior to the energy crisis, Montero refused to lend VAT on electricity because it was not “in line with European standards.”

Neither then nor now. Already in April, following the invasion of Ukraine, Paolo Gentiloni, the European Commissioner for Economic Affairs, sent a letter to EU governments warning that reductions in indirect taxes, such as VAT, “are not necessarily the most effective way to address access.” Energy, especially if high prices are maintained. In this letter, he criticizes these types of measures for their ineffectiveness, inconsistency with the 2030 climate targets, and unfairness because they do not focus on helping the most needy.

The change in criteria by the government comes against the backdrop of a prolonged inflation scenario, given that the war in Ukraine continues and the energy shock caused by the armed conflict has few signs of a short-term solution; On the contrary. Gas prices, which multiplied by six last year, rose again last week and returned to March levels after the Russian invasion.

This Wednesday, the head of the International Energy Agency (IEA), Fatih Birol, issued a disturbing warning and called on Europe, in statements from the Financial Times, Prepare for the imminent cessation of exports From Russia.

“This is a PSOE measure, which is not bad, but it is far from enough to protect families from rising inflation and the executive to regain political initiative,” said Pablo Echenick, a spokesman for United We Can in Congress. Its formation calls for “much bolder measures, such as a € 300 check for households and a € 10 transport pass,” which “large power companies and large oil companies will have to pay more in taxes.”

The measure was announced at a time when tax increases, which the government has said it wants to address to energy companies, have led to the so-called falling of the sky. To reduce the benefits, as Italy, the United Kingdom, Greece or Hungary have done, and recommended, inter alia, the Organization for Economic Co-operation and Development (OECD) and the European Commission. The event, which was rejected on Wednesday by the CEO of the CEOE Employers Association, Antonio Garamendi, who offered an alternative pension adjustment.

Further reduction of VAT on electricity has little support among experts. Xavier Labandeira, a professor of economics at the University of Vigo, an expert on energy taxation and one of the members of the committee of tax reform experts who recently advised the government, warns e. This situation will prevent much-needed improvements in energy efficiency in the electric arena.

“In general, inadequate signals are being sent for the profound transformation that will be needed to achieve the energy and environmental goals of 2030 and 2050.

Labandeira notes that “the distributive impact of VAT reductions on electricity is progressive: they benefit proportionally more to those who have less, but the cost of collection for the public sector is concentrated in groups with greater economic potential.” And he insists on “the convenience of arbitration distribution compensations aimed only at vulnerable groups and limited economic sectors that are ideally not related to the price of electricity, to improve its distribution efficiency, promote energy efficiency and reduce the use of public resources.”

Diego Martinez, a full professor in economics at Pablo Olavid University in Seville and Secretary-General of the Pedro Sanchez Government for Autonomous and Local Funding from 2018 to 2020, believes the event is a “patch” that could be “counterproductive”. “And” there are more disadvantages than advantages. ”

“If we think this is a conjunctural and punctual explosion of inflation,” temporary and limited reductions may work. “But there are many people, including central banks, who think that this episode of inflation will continue until a large part of 2023.”

“If we delay realizing that we are poorer,” we will “delay adjustments, distort price signals,” and energy savings will not be encouraged, says Martinez, who warns of the risk of “conquering” companies by downgrading.

The view is shared by economist Juan Luis Jimenez, who sees the measure as “regressive” and that “in a competitive market” such as the electricity market, there is a “high probability” that power companies will experience a downturn.

In the case of VAT on electricity, Diego Martinez estimates that “about 50% may remain on the edge of business”, but not “immediately”. “There is already more than reasonable doubt that this happened in connection with the fuel premium,” he recalls. For this reason, he is calling for a revenue pact to “cut costs”, distribute them and meet the crisis with a “realistic attitude”, with a “targeted” transfer of revenue to the most vulnerable. Not a “generalized tax reduction cannon.”

The VAT cuts were also not in the recommendations of a group of experts commissioned by the government last year for tax reform, the findings of which were presented at the outset of the war.

As Olga Canto, who was a member of this committee and is a full professor of economic theory at Alcala University, explains e. For ecological transitions “and, obviously, they are far-sighted because they do not address the origins of the problem.”

This group of sages has concluded that Spain loses extra revenue from many products and services related to reduced and excessively reduced VAT rates, and the Independent Fiscal Liability Authority (AirEF) estimates that it’s about 30,000 million annually. The nearly 800-page extensive document offered the total VAT rate as a long-term measure that could be lower than the general, low-income compensation to avoid this tax being clearly not regressive.

The report states that “a permanent reduction in the VAT rate on electricity”, in addition to being incompatible with the committee’s recommendations, “could lead to excessive collection costs and excessive electricity consumption”, with the corresponding results being “excessive. “Expansion of the generation park and higher environmental costs associated with higher emissions and renewable new equipment.”

But the document spoke of a constant fall and emergencies requiring emergency measures. From the field of consumer associations, Fakua reads that “the PSOE avoids offering new taxes to electricity companies and confines itself to announcing another reduction in VAT on electricity,” but acknowledges that “this could lead to another drastic reduction. An increase in the electricity tax.”

Adding to this new tax is the Iberian limit on gas, which, as Vice President Ribera explained in Congress this Wednesday, saved between $ 25 and $ 30 a megawatt-hour (MWh) a week for energy. Consumers directly affected by the wholesale electricity market, Voluntary Rate Adjustable Rate (PVPC) for small consumers.

Ribera said the margin allowed (calculating compensation for the price of this raw material for power companies) that the average price of electricity for the beneficiaries of the event “remained” at 249 euros. Without it, it would have reached 280 euros, compared to 287 euros / MW in France and 303. In Italy, 303. ” “The peak,” he assured.

Source: El Diario

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