The government had other options other than lowering the VAT on electricity, more redistributive, with more income for the state, but less popular

Next Thursday, in an extraordinary Council of Ministers, the Government will approve a reduction in VAT for the electricity bill. The reduction will be from the current 21% to 10% for those contracted powers lower than 10 KW. Therefore it is a discount focused on families and not to companies.

The reduction will last (at least) until December 31, 2023 and will apply as long as the wholesale market price is above 45 euros / MWh. Currently prices are around 90 euros / MWh but it is true that Throughout the year we have seen prices below the limit set by the Government.

Another measure that will come into force is the suspension, at least during the third quarter of the year, of the tax on electricity generation which is 7%.

This will affect us on the invoice

The measure will ease the bill in two ways. On the one hand directly, since the current VAT of 21% will become 10% and this is a reduction of 9% on the invoice.

On the other hand, the tax on electricity generation appears indirectly in energy prices, although not broken down as such in the bill because it is charged to generating companies which in turn pass it on to users via higher energy prices.

Between these two measures we can be talking about a reduction of approximately 12% in the invoice. This implies a relief of about 80 euros per year for the average user, which would practically offset the higher prices we have due to various factors.

This time it will not happen like with the cinema

One of the fears among consumers is that this VAT reduction is not passed on to the consumer. There is a very close example, when VAT was lowered on cultural shows and cinemas did not lower prices.

However, the electricity market is something different. On the one hand, most consumers are in the regulated market and the marketers simply charge what the government tells them. And on the other, the prices that are negotiated in the free market are before taxes, for which a change in VAT would have a direct impact.

In the case of the generation tax we are facing a competitive market, where prices are set based on an auction in which multiple factors intervene such as demand, climate (for the amount of renewables that can enter) and the state of the centrals. Therefore the reduction of this tax will have a lower effect on the invoice for customers with a regulated price, not so in those that are in the free market.

Therefore, we are facing a reduction in VAT and taxes that will have a direct impact on most consumers, not as in the case of cinema where prices can be changed at the decision of the company at any time.

The other options

In general, any VAT reduction seems like a bad measure to me. The reduced rates of VAT tend to end up being discretionary and complicated, you just have to see the rules that have been put in place (only for powers less than 10 KW, only if wholesale prices exceed a certain threshold). And for reasons like this we got so many holes in taxes.

Normally the redistribution that the State has to make to the most needy must be done through spending, not via income. That is, instead of complicating the collection of VAT and also doing it indiscriminately (many of those who will benefit from this reduction in the invoice have no problems making ends meet), an action can be made focused on who else you need it.

In fact There is already a mechanism to prevent electricity prices from affecting vulnerable consumers and it’s called social bonus. In other words, the consumers most affected by these increases already have a discount that can range from 25% to 50%. If it is not enough, the Government could simply raise this discount temporarily and it would be cheaper.

If the problem is that there are not all those who should be in the social bond, then should reform. But it is also true that there is another mechanism to reach the most vulnerable and that is the Minimum Living Income.

The problem is that the Minimum Living Income has not been deployed quickly and that’s where the resources should be. In his day we already warned that one could have opted for a more general IMV, faster to deploy and that it would then be compensated in personal income tax if someone received it without deserving it but that structure was not chosen.

What we are seeing now are patches precisely because not all vulnerable consumers are covered. And these patches have a very important fiscal impact and we have a very large deficit. The measures in these times should be surgical, spend the money as best as possible, do not water the senseless country with money.


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