Spain extends public transport discounts but backs down on diesel tax increase and scraps reduced IVA on staple foods

The Spanish government has approved a package of economic measures, which include a six-month extension of public transport discounts, an increase in pensions and an extension to restrictions on foreign takeovers of Spanish companies.

Appearing before the media following the last cabinet meeting of 2024 on Monday 23 December, Spanish prime minister Pedro Sánchez said Spain is the country that is experiencing the most growth compared to most of the world's main economies after creating 400,000 jobs in one year. "The data allows us to look forward to the beginning of 2025 as one of the most promising economies in the West," he added.

Sánchez added that the public deficit will be down to 1.8% of GDP by the end of 2027, achieving a reduction from 2% two years earlier than expected. Despite this prediction, the Bank of Spain expects the deficit to remain at 2.7% by then if no additional revenue and expenditure adjustment measures are taken.

European funds have contributed to economic growth, Sánchez said, with 44 billion of the 79.80 billion from Brussels spent. "They have made it possible to modernise our productive fabric, which was the fundamental objective of these funds," he said, adding that the industries where most jobs are being created are consultancy and technology.

Under the economic measures package, the government will eliminate the IVA sales tax on staple foods, and backed down on an increase in its diesel tax, one of the star measures with which the government expected to raise an extra 1.5 billion a year. A diesel tax, an obligation imposed by Brussels, did not get passed in cabinet as planned. The treasury said they are still "talking and negotiating" about the measure, which, if it comes into effect, will come into force in 2025. It is expected it will come into effect in April.

Although the minister of transport, Óscar Puente, threatened to scrap public transport discounts, a political negotiation with Podemos forced the government to extend subsidies for six more months, until 30 June 2025. The transport subsidies have been in force since 2022. Sánchez pointed out a 13% increase in the use of public transport since then and said the subsidies will be extended with the same scheme as before, but that from 1 July a "new model" will be introduced with "very significant" discounts for passengers.

From 1 July a single Cercanías season ticket of 20 euros will be created for the whole of Spain, while regional transport will continue to be discounted by at least 40%. Young people between the ages of 15 and 26 will pay only 10 euros, and those under 15 will pay nothing, according to the ministry of transport.

The annual cost of public transport subsidies is 1.47 billion euros for the central government, plus 420 million euros from other administrations. Extending the measure for six months will mean a new disbursement of some 750 million euros for the state coffers, which will directly affect the public deficit.

The economic measure that will lapse as of 1 January is the reduction of the IVA sales tax on staple foods such as olive oil, pasta and seed oils. Throughout this year, the rate of this tax has been recovering its level and is expected to return to its usual percentages on 1 January. From October until 31 December, the rate for staple foods such as bread, eggs, vegetables and fruit and olive oil is 2%, while the IVA rate for pasta and seed oils is 7.5%.

With the new year, and in view of the significant moderation in prices following the inflation crisis, IVA on staple foods will return to 4% - the super-reduced rate - , while that on pasta and seed oils will return to 10% - the reduced rate applied to staple foods. However, when rates return to normal, IVA on olive oil will be 4% - the super-reduced rate - instead of the 10% it has been charged in the past.

The final cabinet meeting of this year also served to approve a battery of measures on housing. Among them, the launch of the long-awaited one-stop shop to control tourist and temporary rentals, which have a lot to do with the steep rise in house prices in recent years. The measure will come into force on 2 January but will be effective from 1 July - once a transition period has ended - and will impose a registration system and an identification number for these short-term rentals.

The target scope covers both the services provided by online platforms to hosts providing short-term accommodation rental services in Spain, and the rental services provided by hosts. The rule applies to tourist rentals, seasonal rentals, rentals of rooms or other properties allowing short-term accommodation and involving financial remuneration, provided they are offered through transactional online platforms.

The government has also amended the public sector contracts law (LCSP) to promote more development of public housing. Following the government's announcement of the creation of a public housing company, the public land corporation (SEPES) will incorporate into its portfolio properties integrated in the state heritage.

The government also issued a decree extending a temporary tax on energy companies into next year despite lawmakers voting last week to eliminate the levy. The decree enters into force on 1 January but it will need to be confirmed by parliament within 30 days in order to apply throughout next year, which may prove difficult to achieve as PNV and Junts rejected the extension.

The government will also extend restrictions on foreign takeovers of Spanish companies it considers strategic until the end of 2026, its so-called 'anti-opposition shield'. The measure came into force in 2023 to protect Spanish companies from possible foreign interests and requires an authorisation process for the acquisition by a foreign entity of major stakes in companies related to fields such as defence, healthcare or telecommunications. Foreign direct investments are considered to be those in which the investor holds a stake equal to or greater than 10% of the capital of the company in question.

The government also decided to extend its social protection measures for vulnerable consumers, affecting their electricity, water and gas bills. From 1 January, vulnerable consumers will receive a 50% discount on their electricity bill. From 1 July it will be 42.5% and from 1 January 2026 it will stabilise to 35%. Severely vulnerable consumers will have a discount of 65% from 1 January, 57.5% from 1 July and 50% in January 2026.

In 2026, the final discounts will be 35% for vulnerable consumers and 50% for severely vulnerable consumers. These are higher than the pre-crisis levels of 25% and 40% respectively.