Since the covid pandemic, Spain has become the second euro area country, after Cyprus, where the share of tax revenues in GDP has grown the most. The International Monetary Fund (IMF) notes that at least half of this higher fiscal pressure is likely to stay. From 2019 to 2024, the tax-to-GDP ratio in Spain rose from 39.2% to about 43%, edging closer to the euro area average of 46.4%. The IMF describes the revenue boom as a driver that halved the gap in tax capacity between Spain and its peers.
According to the IMF, the key question is whether this surge in revenue will prove temporary or permanent, as this distinction will shape the consolidation plans required by new European Union fiscal rules. The IMF estimates that about 3% of GDP of adjustment will be needed by 2028. In its view, a portion of the higher revenue—roughly between 2 and 2.5 percentage points of GDP, equivalent to almost 39 billion euros—could persist in the medium term.
In the IMF’s assessment, the persistence of higher revenue is tied to a sustained rise in employment. As long as the job market remains robust, the higher tax receipts are likely to endure. The inflation-driven boost to income tax (IRPF) is not expected to vanish overnight, even though regional governments have taken measures to cushion its impact. Pension-system reforms are also projected to keep social security contributions rising as planned.
Conversely, a portion of the increased revenue might fade. The IMF notes that between 2 and 1.5 percentage points of GDP could disappear over time, translating to between 31,000 million and 23,000 million euros, which would limit the government’s ability to rely on this rise for future budgeting.
Surprising growth in revenues
These are among the conclusions of IMF documents on Spain’s economy released last week, part of the regular Article IV consultations. The IMF recalls how Spain recovered from the 2008 financial crisis: after the housing bust, revenues collapsed and took years to rebound. Yet, after the pandemic, aggregate tax revenues did not fall as much as production did, which is considered surprising by many economists.
Economists have not entirely explained why tax receipts expanded so much after the pandemic, especially in a context of tax cuts rather than higher taxes. Some think tanks, like the Instituto Juan de Mairena, report a total of 69 tax and contribution increases since 2018, while annual data from Spain’s tax agency show larger net tax reliefs, with tax changes in recent years reducing net revenue by more than 8 billion euros. Much of these reliefs were designed to cushion the effects of covid, rising energy costs, and higher food prices on households’ incomes.
Autonomous communities also implemented tax relief measures in this period, with 2024 alone showing an estimated autonomous relief of around 2,051 million euros.
Altogether, the combined tax and social security contributions across all levels of government rose by nearly 138,000 million euros from 2019 to 2023. Because revenue growth outpaced GDP growth, the tax burden rose from about 39% to the IMF’s 2024 estimate of 43% of GDP.
Different drivers
A primary driver identified by the IMF is the strong employment rebound, supported by large migration flows. Spain reached its historical peak in employment in the 2021–2023 period, and IMF projections through 2029 anticipate continued meaningful employment growth.
The inflation spike in 2022, the IMF notes, left a lasting imprint on IRPF receipts that is unlikely to fully reverse. The Banco de España estimates that taxpayers paid an extra 11,000 million euros in IRPF due to inflation since 2019.
Another contributing factor is the shift to electronic payments during the lockdown era, which helped surface VAT bases. The IMF suggests that electronic payments may remain structurally higher, though predicting further increases remains challenging.
Looking ahead to 2024, the IMF expects a modest rise in VAT receipts as anti-inflation support measures are unwound and VAT rates recover to pre-crisis levels by roughly 0.3–0.4 percentage points of GDP. In particular, the complete removal of VAT reductions on electricity, gas, and basic foods would add about 0.2% of GDP to state revenue. At the same time, improving business results is aiding the recovery of corporate income tax revenues.
Social security contributions are projected to keep growing over the next decade, roughly around 1% of GDP as pension reforms enacted between 2021 and 2023 are implemented gradually.
All these factors underpin IMF expectations that Spain will consolidate between 2 and 2.5 percentage points of GDP of the higher revenue observed in recent years.
Revenue measures
To complete the structural adjustment required by EU rules, the IMF recommends primarily revenue-focused measures. Alongside phasing out remaining anti-inflation support measures like the food VAT cut, it calls for eliminating VAT exemptions, harmonizing VAT rates across goods, and increasing environmental taxation.
To offset the impact on lower incomes, the IMF suggests expanding work-related tax deductions, broadening active labor market policies, and increasing the supply of affordable housing.
The IMF also expresses caution about levies on extraordinary profits, such as those currently in place on banks and the energy sector in Spain. If such levies become permanent, the IMF advises redefining the bases of taxation for these sectors accordingly.
That is the gist of the IMF’s conclusions about Spain’s fiscal path. The discussion highlights how multiple, interlocking forces shape tax policy and the country’s fiscal outlook in the coming years.
Note: This summary reflects IMF analysis and is intended to capture the broad contours of their recent IMF discussions on Spain’s economy and tax system. Citations are attributed to the IMF’s Article IV reports and related country analyses.