Spanish Households Face Declining Real Income amid Rising Income Tax Burden
In 2024, Spanish households reported lower net income than in 2008, yet they are paying more in income taxes.
In 2024, Spanish households experienced a decline in real net income compared to 2008, during which the economic repercussions of the financial crisis began to unfold.
Despite this decrease in income, households are facing a higher real burden from the Income Tax for Individuals (IRPF) compared to the pre-crisis period, as analyzed in a recent report by economist Desiderio Romero-Jordán, published in Cuadernos de Información Económica by Funcas.
The report highlights that over a decade after the onset of the financial crisis, Spanish households have not, on average, regained their real economic capacity.
The analysis found that the primary sources of tax revenue include the Income Tax for Individuals (IRPF), Value Added Tax (VAT), Corporate Tax, and Special Taxes.
Tax collections from these four sources increased by 8.1% in 2024, amounting to €21.167 billion.
Consequently, their share of GDP rose from 17.4% to 17.7%.
Approximately 40% of this revenue increase was attributed to the IRPF, followed by contributions from VAT, Corporate Tax, and Special Taxes.
The report pointed out that, as in previous years, the IRPF was the main contributor to tax revenue growth.
Analysis indicates that the average real burden of the IRPF borne by households in 2024 surpassed the 2008 benchmark, reaching an index of 114.4. Conversely, the average real net income index for 2024 stood at 95.7. According to Romero-Jordán, if the current pace of real income growth continues, it will take several years for households to converge to the income levels of 2008.
The report characterized the average IRPF burden in 2024 as 'clearly' higher than in 2008. Given that IRPF payments constitute part of disposable income, the absence of indexing post-pandemic has hindered the growth of households' real income.
As a result, the erosion of real income is expected to continue in the absence of specific adjustment measures, with any real wage gains being contingent upon improvements in productivity.
Regarding VAT pressure, the report shows that it stood at 5.7% in 2024, which is in line with the average during the post-pandemic period and equivalent to 2019 levels.
Between 2021 and 2024, VAT reductions were implemented as part of social protection measures, including cuts on electricity VAT (from 2021 to 2024), gas VAT (from 2022 to 2024), and food VAT in 2023 and 2024.
These reductions were partially offset by increased VAT revenue due to high inflation.
Romero-Jordán estimated that inflation added an average of €75.7 to households' VAT bills in 2021, €195.2 in 2022, €98.6 in 2023, and €69.2 in 2024. Furthermore, the withdrawal of these fiscal reductions is forecasted to boost revenue in 2024 to €6.632 billion.
As a result, it is predictable that VAT tax pressure will persist in the coming years, following an upward trend seen since 2013, particularly if the high proportion of VAT-contributable spending relative to GDP continues; the post-pandemic average since 2021 has been 41.2%.
Despite this decrease in income, households are facing a higher real burden from the Income Tax for Individuals (IRPF) compared to the pre-crisis period, as analyzed in a recent report by economist Desiderio Romero-Jordán, published in Cuadernos de Información Económica by Funcas.
The report highlights that over a decade after the onset of the financial crisis, Spanish households have not, on average, regained their real economic capacity.
The analysis found that the primary sources of tax revenue include the Income Tax for Individuals (IRPF), Value Added Tax (VAT), Corporate Tax, and Special Taxes.
Tax collections from these four sources increased by 8.1% in 2024, amounting to €21.167 billion.
Consequently, their share of GDP rose from 17.4% to 17.7%.
Approximately 40% of this revenue increase was attributed to the IRPF, followed by contributions from VAT, Corporate Tax, and Special Taxes.
The report pointed out that, as in previous years, the IRPF was the main contributor to tax revenue growth.
Analysis indicates that the average real burden of the IRPF borne by households in 2024 surpassed the 2008 benchmark, reaching an index of 114.4. Conversely, the average real net income index for 2024 stood at 95.7. According to Romero-Jordán, if the current pace of real income growth continues, it will take several years for households to converge to the income levels of 2008.
The report characterized the average IRPF burden in 2024 as 'clearly' higher than in 2008. Given that IRPF payments constitute part of disposable income, the absence of indexing post-pandemic has hindered the growth of households' real income.
As a result, the erosion of real income is expected to continue in the absence of specific adjustment measures, with any real wage gains being contingent upon improvements in productivity.
Regarding VAT pressure, the report shows that it stood at 5.7% in 2024, which is in line with the average during the post-pandemic period and equivalent to 2019 levels.
Between 2021 and 2024, VAT reductions were implemented as part of social protection measures, including cuts on electricity VAT (from 2021 to 2024), gas VAT (from 2022 to 2024), and food VAT in 2023 and 2024.
These reductions were partially offset by increased VAT revenue due to high inflation.
Romero-Jordán estimated that inflation added an average of €75.7 to households' VAT bills in 2021, €195.2 in 2022, €98.6 in 2023, and €69.2 in 2024. Furthermore, the withdrawal of these fiscal reductions is forecasted to boost revenue in 2024 to €6.632 billion.
As a result, it is predictable that VAT tax pressure will persist in the coming years, following an upward trend seen since 2013, particularly if the high proportion of VAT-contributable spending relative to GDP continues; the post-pandemic average since 2021 has been 41.2%.
Translation:
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