Reduce prices or provide assistance
When a new Spanish government takes the stage after Pedro Sánchez steps forward, one of its first tasks is deciding the fate of anti inflation measures that expire on December 31. These are the policies the government put in place to combat rising costs since June 2021, a program that has totaled almost €50,000 million in relief. Energy costs have been pressured by the war in Ukraine, and food prices have also risen, prompting actions to cushion Spanish families, similar to moves seen in other euro area nations. Teresa Ribera, the third vice president, has expressed support for extending the VAT reductions on electricity and gas and other shock measures through 2024, an extension that the Tax Office estimates could reach up to 15,000 million. Yet institutions such as the European Commission and the International Monetary Fund have urged Spain to end broad based subsidies and to continue only targeted aid for the most vulnerable populations.
Evidence from a recent European Central Bank study indicates that anti inflation measures in the euro area generally help offset inflation related losses by about one third in purchasing power, reducing the impact of price increases and narrowing inequality between lower and higher income families. Spain and Germany, however, have not experienced the same benefits in practice, highlighting different national approaches.
Reduce prices or provide assistance
The central argument is clear: Spain has favored broad indirect tax relief that lowers energy and food prices over direct subsidies targeted at low income households. This contrasts with examples from other countries such as Portugal, where more direct aid has been employed. The ECB note on inflation, fiscal policy and inequality outlines this distinction and explains how Spain’s approach forms part of a wider discussion about policy effectiveness.
By design, price measures have encompassed more than 80 percent of Spain’s fiscal efforts, well above the euro area average of about 50 percent. This includes broad based actions like reducing value added tax on electricity and gas, and subsidies from 2022, including a 20 cent per liter discount on fuel for specific periods. In contrast, income oriented measures, which have greater potential for redistributing resources, accounted for roughly 20 percent of the total Spain budget effort, compared with about 50 percent in the euro area. These income oriented steps include certain tax reliefs, housing support of 200 euros, a 15 percent rise in non contributory pensions, and measures like a guaranteed basic income.
Proponents argue that price oriented measures can curb general price surges for all consumers, but they come with higher fiscal costs and ambiguity about whether discounts are fully passed through by companies to shoppers. In contrast, income oriented policies are viewed as more targeted and potentially more effective at reducing inequality, though their reach has been historically narrower in Spain.
comparison study
The lack of a sharp focus on inflation responses in Spain has drawn attention from both the Bank of Spain and Airef, the financial watchdog. The ECB article makes a new point by allowing cross country comparisons of inflation countermeasures. Governments vary widely in strategy: some primarily counter price increases (Greece is cited as an example), while others lean more on transfer payments to households (Portugal is highlighted). Across the board the inflation shock widened gaps between rich and poor, yet most countries managed to offset much of this effect, with Spain and Germany highlighted as exceptions where relief did not fully shield lower income groups.
The report analyzes how anti inflation measures dampened inflation across major euro area economies, focusing on Germany, France, Italy, Spain, Portugal, and Greece. These six economies represent a large share of the euro zone population and output and together enacted a substantial set of measures in 2022. Across the euro area, inflation rose from 2.6 percent in 2021 to 8.4 percent in 2022, with energy price shocks partly offset by policy actions, roughly equivalent to 2 percent of GDP. The ECB research estimates that anti inflation steps in the euro area reduced the overall inflation rate by about 1.6 percentage points, while a Bank of Spain analysis suggests that Spain’s measures accounted for about 1.3 percent of GDP in 2022 and reduced inflation by around 2.3 percentage points from the average.
Inequality
The ECB study’s thirteen authors agree that energy and food costs disproportionately affected purchasing power and living standards for low income households in 2022. These families spent nearly all their income on essential goods and services, with energy and food taking up a larger share of their budgets. In Spain, the Bank of Spain estimated that inflation persisted through the 2021 to 2022 period, with a higher impact on lower income households in the shopping basket than on higher income households. The ECB report estimates that anti inflation measures generally offset about one third of the loss in purchasing power for euro area households, and they close a sizable portion of the inequality gap between the lowest and highest income brackets. Yet in Spain and Germany the measures aimed at containment did not translate into stronger relief for low income families as much as hoped.
In the German context, inflation relief primarily rested on nominal wage growth rather than direct distributions to lower income groups. The report notes that low income households in both Germany and Spain have faced a meaningful erosion of disposable income during the inflation shock.