Pedro's Cakes

Brioche cake

In this week's Camino a Ítaca, a cursory look at the Spanish government's reaction to the ongoing inflation crisis that is sweeping across the world. Click over to read the original article in el HOY in Spanish or read the English translation below. (PDF abajo)

It’s finally over. The marathon with seemingly no end that is the Spanish Christmas holiday season has finally finished. Today, as you ask what to do with the leftovers from yesterday’s meal, you start to take balance of what the successive holiday meals have cost and wonder: was it all really worth it?

According to El País, these costs have risen 40% over the past year in some cases. Price increases that have been ostensibly blamed on the impact that the war in Ukraine has had on production and global supply chains. This, combined with anterior increases in energy prices, have led to rises that have been especially noticeable on staple products. Day to day items such as flour, butter, sugar or the mayonnaise for your prawns have all experienced increases of 40% and sometimes more.

It's a number that seems to repeat itself, somewhat cynically, when you take into account that the profits of the five major Spanish energy companies shot up by 40% in the first three quarters of 2022. All this during an economic slowdown that has also perplexingly seen the banking sector post the highest earnings in its history. Entities like Santander, BBVA, CaixaBank and Bankinter all closed the year with record profits.

Within this scenario, Pedro el guapo, as the American press christened him, has come out with measures that parallel the famous phrase wrongly attributed to Marie Antoinette, ‘Let them eat pasteles.’

In the midst of the worst inflation crisis in decades, the government’s reaction has been to suppress the 4% VAT on certain staple items and lower others from 10% to 5%, pasteles indeed. A move that was floated by the opposition earlier in the year and criticized by prominent members of the government’s own coalition only weeks ago.

What makes the measure even more baffling is that it has been taken with full knowledge and experience that whenever VAT is lowered, large companies simply increase their unit profit margins a week later. Just as was experienced with the electric and film sectors, companies will simply absorb the VAT cut on basic foodstuffs and then tack on further increases. The delusion that they will choose to act ethically is akin to a vegan campaigner asking a lion to choose broccoli over lamb. It simply isn’t in its DNA.

What is needed are price interventions to reign in the profits of these companies that are making a fortune. Regrettably, the government has given up its legal mandate to prevent these extortionary profit margins by imposing price ceilings, as has happened in other countries.

Any tax cut in a sector such as food, without effective price controls, will simply be included in prices in two days and will solve nothing. Without price controls, lowering VAT is an amigo invisible subsidy gift to capital and results in less taxes in the public coffers, causing a further deterioration of public services.

After decades of economic deregulation, the government is either unable or unwilling to take preemptive measures in this debilitating crisis. Rather than making bold, definitive moves to proactively curb these predatory practices, it seems to have gifted the opposition with a new campaign slogan, ‘let them eat seafood’.