Any new steps Spain takes to help vulnerable households cope with high energy prices should be more limited than during the COVID-19 pandemic so as not to exacerbate the country’s already high debt and deficit levels, the Bank of Spain governor warned.
“Our fiscal room is smaller. We are currently experiencing an inflationary episode to which fiscal policy should not be contributing,” Pablo Hernandez De Cos told a financial event on Friday.
The cabinet will hold an extraordinary meeting on Saturday to approve new aid measures, including halving the value-added tax charged on electricity bills to 5% to help shield consumers from rising energy prices.
The government is also planning to increase taxes on electric utilities, though Budget Minister Maria Jesus Montero did not say by how much or when.
The new set of measures follows a previous package approved in March, and in force until the end of June, worth 6 billion euros ($6.3 billion) in direct aid and tax cuts and 10 billion euros in so-called soft loans to help companies and households cope with higher fuel prices.
The central bank chief said fiscal measures should be focused on the households hit hardest by the price shock and be of a temporary nature so as not to widen the structural deficit.
The new package will be in force until the end of 2022, Prime Minister Pedro Sanchez said on Friday.
As of March, Spain’s debt-to-GDP ratio stood at 117.7%, and the government has been planning to narrow this year’s budget deficit to 5% of economic activity from 6.9% in 2021.
“Fiscal policy must play a different role in this second crisis than it did during the pandemic,” De Cos said.
To help companies and households cope with the COVID-19 pandemic, the Spanish government approved up to 140 billion euros in state agency ICO credit lines in 2020.