Consumers to see loss in spending power in 2013
Tax hikes, removal of benefits and wage caps will all erode purchasing ability
The New Year will kick off with a series of whammies for the consumer, including a rise in the price of basic services such as electricity and public transport and tax hikes, alongside a cap or even a reduction in wages and the threat of unemployment for those other than the quarter of the working population who are already out of a job.
The result of this unappetizing cocktail of inflationary pressure and recession will be an overall erosion in spending power for households, possibly the biggest since democracy was restored after the death of Franco nearly 40 years ago.
Three million civil servants have seen their wages frozen and no one is ruling out that once again they will see their extra payments (Christmas and summer) suppressed. In addition nine million retirees who receive a state pension of over 1,000 euros a month will see their benefits increase by only one percent, while those receiving less than that will get an increase of two percent, without any top-up to compensate for the loss of purchasing power as a result of inflation coming in well above the official forecast for last year.
Private sector workers will also have to tighten their purse strings. The most optimistic scenario for wages this year is an average increase of 0.6 percent, although under the current constrained situation, salary cuts are increasingly becoming the norm as a means of avoiding companies shutting up shop or laying off workers.
Goodbye to tax rebates on family home
Major real estate consultants are predicting a further fall in house prices this year of up to 30 percent, while the one-year Euribor rate, the main rate for setting mortgage payments, ended last year at a record 0.55 percent. But despite these positive factors, the removal of tax breaks for purchasing the family home is likely to make it more expensive for households to service their home loans.
Prior to the start of this year, families were allowed to discount 15 percent of their annual payments to acquire their main residence, up to a maximum of 9,040 euros, which meant savings of up to 1,356 euros annually. The abolition of this benefit is expected to swell the state coffers by 430 million euros.
The price of acquiring a new home is also set to rise from the start of this year, with the super-reduced value-added tax rate on such purchases increasing to 10 percent. The VAT rate has also been increased by the same amount for reforms carried out to the main home and for the repair of buildings destined for housing from 8 percent to 21 percent. This is forecast to bring in a further 750 million euros.
Tax breaks for improvements in buildings, which up until now amounted to an annual maximum of 6,750 euros a year for a total per building of 20,000 euros, were also eliminated at the start of this year.
"Almost all of the tax breaks on housing disappear in 2013," notes Manuel Andrés Díaz, a member of the tax advisor's association Aedaf.
The recently unemployed will also see a fall in their jobless benefits as a result of a decree approved in July of last year. Although the maximum period of entitlement remains at two years, after six months they will receive only 50 percent of the regulatory basis used to calculate entitlements, compared with 60 percent previously. The situation of the increasing number of jobless who have exhausted their right to benefits is even more precarious, given that the crisis started to get worse in 2009, with massive layoffs.
Real incomes have also been undermined by inflation, which in November of last year stood at 2.9 percent, compared with an official forecast of 1 percent.
As the International Labor Organization (ILO) pointed out in its latest report on Spain, the government is pursuing a policy of internal devaluation, increasing competitiveness through salary cuts, without this being extended to price containment. This policy is expected to be accentuated this year. Although not binding, the three-year agreement signed by the country's main labor unions and the Spanish Confederation of Business Organizations (CEOE), the main employer group, calls for a maximum average increase in wages of 0.6 percent this year.
- Electricity rates rise. The government has approved a minimum increase of 3 percent for domestic users. However, those that have contracts for the supply of between three and 10 kilowatts - the majority of households - face surcharges of between 1 and 10 percent if they exceed average consumption by more than 10 percent. The consumer protection group OCU estimates that on average electricity bills will increase by 6 percent, while its peer FACUA calculates a rise of 8.3 percent.
- Public transport. Getting about on subway trains and buses will cost more this year, with fare hikes justified by the need to reduce the losses of companies supplying these services. The state-owned railway operator Renfe increased suburban and medium-distance fares by an average of 3 percent and has yet to decide on its approach to high-speed train journeys. Inter-city bus fares have been increased by 6.07 percent, while road-toll rates and urban bus fares have also been hiked.
- Lower state pensions. The government left its decision not to top up pensions to compensate for higher-than expected inflation right until the end of the year. In the case of those receiving the average state pension of 835 euros per month, the failure to compensate them for the impact of inflation will result in the loss of 436 euros a year.
- Lottery levy. Those fortunate enough to have won a prize on the Spanish state lottery from the start of this year will have to pay a levy of 20 percent on winnings of over 2,500 euros. Before, prizes were tax free. This will yield an increase in revenues of 824 million euros this year.
- Tobin tax. The Spanish government is considering taking a leaf out of France's book by imposing a levy on financial transactions, known as the Tobin tax.