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Spain uses a windfall tax to make some train journeys free

Geoff Riley

15th July 2022

Here is an interesting example of hypothecated taxation. The Spanish government is using proceeds from a windfall tax to make some train travel free.

Hypothecation means using revenues raised from taxation in a clearly-stated direction. Inn the UK for example, proceeds from the sugar tax were - in theory - assigned to increase funding for primary school sports. Whether this has actually happened is open to conjecture.

But the decision by the Spanish government is an attempt to use fiscal policy to directly address their own cost-of-living crisis. New windfall taxes on banks and energy companies in Spain are expected to generate €7 billion (about £5.9 billion) in 2023-2024.

The tax revenues will be used to help finance free train tickets on selected journeys offered by Renfe, Spain’s state-owned company. And some of the money is earmarked for grants to a million scholarship holders at schools and universities, and funding for 12,000 homes in Madrid.

In my view, there are strong economic and environmental grounds for using state subsidies to make rail and bus travel more affordable. Can you imaging how this might affect our travel choices in the UK? Could our rail system cope with a strong increase in demand? Certainly, the contrast with our obscenely high rail fares could not be more stark.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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