Spain: Economic and fiscal situation and windfall profit bank levy

The International Monetary Fund released its annual report on the Spanish economy, in which, in addition to analyzing its situation, outlook and challenges, it dedicates a specific annex to “temporary taxes on banking and the energy sector”.

Main conclusions:

• Spanish Economy: According to the report, with a growth of 2.5 percent of GDP in 2023 (and estimates of +2.4% in 2024 and +2.1% in 2025), the Spanish economy has demonstrated remarkable resilience to elevated global uncertainty and tighter financial conditions. Factors that could put the estimates at risk would be the following: internal political fragmentation, lower execution than expected in the NGEU funds, increased geopolitical risk and higher inflation.
  
  
• Public finances: the report considers positive a medium-term fiscal consolidation plan to preserve growth, to reduce public debt and deficit levels and to guarantee the sustainability of pension spending. Among other measures, it suggests increasing the tax bases, improving existing inefficiencies (i.e. low VAT collection, elimination of some measures adopted in the crisis), without further resorting to windfall levies.
  
  
• Windfall profit levies on the banking and the energy sectors: In general, the report considers that Windfall levies do not constitute a growth-friendly consolidation strategy and they do not constitute a sound alternative to more structural revenue-raising tax policy measures. The use of windfall taxation should remain limited and temporary, so as not to create uncertainty and distortions that reduce potential investments, reducing economic growth.
  
  
• In the specific case of the windfall banking levy, the report comments that it does not make sense how it has been designed, its magnitude is sizable enough that it could factor into banks' future decisions if extended and, if it becomes permanent, it should be redesigned, and could be used to support macroprudential policies (by reinforcing the capital of entities, for example). It should also tax extraordinary profits (a clear definition of “excess” profits is advisable), instead of interest margin and fees, as currently defined. In any case, the report highlights that revenues collected by this windfall levy will decrease in the coming years if interest rates still easing and if it is redesigned following IMF´s recommendations.