Government revenue in the wake of the pandemic. Tax residuals and inflation

Abstract

Rationale Following the COVID-19 pandemic, tax revenue has shown strong dynamism, increasing as a proportion of GDP by 3.7 percentage points since 2019. Understanding the nature of this dynamism is key to assessing Spanish fiscal policy. Takeaways • This article breaks down revenue growth into four explanatory factors: real economic activity, price growth, the effect of fiscal measures and an unexplained component or tax residual. • The effect of prices (inflation) has been gaining weight and appears to account for somewhat more than half of the revenue growth observed in 2022, especially from VAT and personal income tax. • It is estimated that 2.6 percentage points of the 3.7 percentage point increase in the revenue-to-GDP ratio cannot be explained by the changes in economic activity, prices or the fiscal measures approved. In the absence of an explanation about the permanent or temporary nature of this phenomenon, the principle of prudence would advise against considering this increase in revenue to be permanent.