Increased Tax Burden in 2024: Indirect Taxes Outweigh the Decrease in Direct Taxes
Takeaways from the 2024 Fiscal Landscape
The financial strains reared their heads once more in 2024, following a slight decline the year prior, due to an upsurge in indirect taxes and social contributions that overshadowed the reduction in direct taxes, as reported by the Public Finance Council (CFC). According to their report, titled "The Shift in Public Finance in 2024," the fiscal burden climbed by 0.1 percentage points of GDP, taking the total to 35.6% of the GDP.
The report indicates that this increase was primarily facilitated by the rise in indirect taxes and social contributions, which comfortably outweighed the drop in direct taxes. Moreover, indicators measuring the taxation impact not only on taxes but also on wages, enterprise profits, and consumer spending also recorded an uptick. The effective social contributions accounted for 22.1% of wages, the Individual Income Tax (IRT) crept up to 18.6% of the gross operating surplus of enterprises, while Value-Added Tax (VAT) and Special Consumption Taxes inched closer to 18.2% of nominal private consumption - reaching "historic highs of the last two decades."
In stark contrast, the Individual Retention Tax (IRS) on specific work income decreased its impact on remunerations to 8.8%. The growth in non-tax and non-contributory revenue was, according to the CFC, momentum-driven by the decline in capital revenue. Public sector income from sales of goods and services and current other revenue experienced a surge, which more than compensated for the drop in capital revenue.
The CFC attributes this recovery mainly to a spike in dividends and the current revenue tied to the Recovery and Resilience Plan (PRR), which upheld about 80% of the surge in current other revenue. Surprisingly, the reduction in transfers of European funds not related to the PRR led to the decline in capital revenue. Although capital revenue under the PRR showed an increase of 16.8% (2.08 billion euros), the total capital revenue dwindled by 20.9%.
In summary, public revenue experienced a growth of 6.3%, which marginally exceeded the State Budget's projection for that year and was inspired predominantly by the vitality of tax and social contribution revenue, which combined accounted for more than 90% of the total growth. Despite the increase in revenue, its percentage share of GDP changed insignificantly, remaining at 43.5%.
On the flip side, public expenditure recorded a third consecutive year of growth in 2024, surging by 7.6%, bolstered in part by the increased execution of the PRR (without which, expenditure would have grown by 7.0%). As a result, the share of public expenditure in the GDP increased from 42.3% in 2023 to 42.8% in 2024. This increase was contributed to by the PRR effect (0.3 percentage points of GDP) and also the denominator (the growth in the nominal product was 6.4%, undershooting the growth in public expenditure). However, public expenditure remained below the forecast provided in the State Budget for 2024.
The CFP observes that personnel expenses and social benefits accounted for over 80% of the rise in primary current expenditure in 2024, thus adding to their rigid nature.
While the enrichment data suggests fiscal challenges persist across various nations, it does not provide specific information to support the findings of the Public Finance Council's report for 2024.
The growth in public revenue was predominantly due to an increase in tax and social contribution revenue, such as Value-Added Tax (VAT) and Individual Income Tax (IRT), in the business sector of the 2024 fiscal landscape. The report also indicates that public expenditure continued to grow, primarily driven by the increase in primary current expenditure related to personnel expenses and social benefits.
