Spain to Implement Temporary Taxes on Power Companies and Banks to Help Tackle Soaring Inflation

Spain’s government plans to impose temporary taxes on power companies and banks in order to generate 7 billion euros ($7.02 billion) in 2023-2024 to help Spaniards deal with rising inflation. Prime Minister Pedro Sanchez stated that a tax on extraordinary profits made by power utilities in 2022 and 2023 should bring in around 2 billion euros annually, while the tax on financial institutions will yield 1.5 billion euros per year. However, this announcement triggered a selloff in some banking shares, with Sabadell declining by 7.4%, Caixabank plummeting 8.6%, and Bankinter falling 5%.

The Spanish government has not disclosed specifics about the proposed rates or the functioning of the taxes, but has indicated that the tax would be applicable to companies generating at least 1 billion euros in turnover. Meanwhile, the Spanish banking association’s spokesperson, Jose Luis Martinez, remarked that the government hadn’t consulted or updated the sector, despite maintaining a regular dialogue. Martinez added that the European Central Bank’s possible rise in interest rates did not necessarily ensure an improvement in banks’ profitability, but rather responded to the rise in inflation and may lead to less economic activity. Analysts argued that the levy would put further pressure on banks’ ability to generate profits at a time when their provisions are also likely to rise.

Sanchez attributed Spain’s rising inflation to Russia’s invasion of Ukraine, stating that it was the country’s biggest challenge, as it “impoverishes everyone, especially the most vulnerable groups.” The government had already announced plans to tax power companies, and shares in utilities Iberdrola, Endesa, and Naturgy fell by 0.2%, 0.6%, and 0.7%, respectively.

In addition to these measures, Sanchez announced 100 euros a month in complementary scholarships for students over 16 who already receive scholarships and free multiple-trip tickets for suburban and medium-distance trains between September and the end of December.

The Spanish government’s decision to impose temporary taxes on power companies and banks has been met with mixed reactions. While it is expected to help the country’s citizens deal with rising inflation, it has triggered a selloff in some banking shares. Furthermore, some analysts argue that the levy would put further pressure on banks’ ability to generate profits at a time when their provisions are also likely to rise. The government has not provided many details on the planned taxes, leaving many companies uncertain about the impact they will have. However, the government has taken steps to provide additional support to students and commuters in an effort to alleviate some of the burdens caused by rising inflation.