Record Tax Revenue in the Canary Islands
The Canary Islands have reached a historic economic milestone, with the Spanish Tax Agency collecting €3.138 billion in Personal Income Tax (IRPF) in the first eight months of this year. This is the highest figure ever recorded for the archipelago in an eight-month period, representing a significant 14.4% increase compared to the same timeframe in 2023. This surge in public revenue is a clear indicator of the islands’ strengthening economy.
A Thriving Job Market Fuels Growth
The primary drivers behind this financial upswing are an improved labor market and salary adjustments designed to offset rising living costs. In August 2024, there were 94,613 more people registered with Social Security than in the same month of 2019—an 11.25% increase. This expanding workforce, comprising potential taxpayers, is injecting vital resources into the state’s coffers. This positive trend is further evidenced by a reduction of over 40,000 registered unemployed individuals by the end of this summer, suggesting improved personal financial circumstances for many residents.
The Impact of Inflation and Wage Negotiations
The inflationary wave that began in the summer of 2021 and was exacerbated by the Russian invasion of Ukraine in 2022 has had a direct impact on wages. In response, collective bargaining agreements have sought to partially compensate for the increased cost of living. While pre-2019 pay rises hovered around 2%, recent increases have been closer to 3% or even 3.5%. However, this push into higher income tax brackets means that even though workers are earning more nominally, a larger portion of their income is going to taxes, often before their pay has fully caught up with household inflation.
The Call for Tax Bracket Reform
This phenomenon, known as “fiscal drag,” has prompted opposition groups and numerous experts to call on the government to adjust the IRPF tax brackets—a process called “deflating.” Without this adjustment, as more workers receive pay rises and employment numbers grow, tax revenue will continue to climb. This dynamic is precisely what has led to the record-breaking collection in 2024 and the robust double-digit annual growth rate of 14.4%.
A Sustained Upward Trend
The improvement in tax collection has been a consistent trend since the recovery from the Great Recession, with the first increase noted in 2017. The only exception was 2020, when COVID-19 restrictions caused an economic standstill. A strong recovery was confirmed in 2022, when personal income tax revenue for the first eight months soared by 41% compared to the previous year. The upward curve has continued since, with increases of 3.9% in 2023 and 9.4% in 2024.
Projections and Regional Action
For context, the entire year of 2023 did not reach €3 billion in revenue for the archipelago. With €3.138 billion already collected by August 2024, it is feasible that the year could end with a total surpassing €3.5 billion. Faced with inaction from the central government, the Canary Islands regional government has the option to deflate its autonomous section of the IRPF to avoid what the Bank of Spain has termed “cold progressivity.” The regional government has already taken this step, alongside four other autonomous communities in Spain.
Public Coffers as the Primary Beneficiary
The Bank of Spain’s concept explains the “strong dynamism” shown by personal income tax collection. Their study estimates that a “uniform 1% increase in household income” translates into a “1.85% increase in tax revenue,” a figure in line with the average elasticity estimated for OECD countries. In essence, the wage increases negotiated between companies and workers are making the public treasury one of the biggest beneficiaries of the islands’ economic growth.
