Good morning from New Economy Brief.

Spanish inflation is now below 2% - the 3rd lowest in the Eurozone behind Belgium and Luxembourg - and it has been falling faster than in other Eurozone economies. Spain has also been implementing interesting policies to shield their citizens from the rising cost of living, and Spain’s President has claimed these have played a role in driving down inflation.

This week’s New Economy Brief explores the Spanish government's use of ‘unconventional fiscal policies’, their role in reducing inflation, and the lessons that can be learnt for other governments. 

How unconventional fiscal policies can help tackle inflation. There are growing calls for governments to use fiscal policies to tackle current high inflation levels, as opposed to relying on interest rate rises. The IMF’s Chief Economist, Pierre-Olivier Gourinchas has argued that ‘unconventional fiscal policies’ have played a significant role tackling inflation in the Eurozone by reducing inflation expectations and preventing inflation ‘passing through’ from areas hit with supply shocks into core inflation in the rest of the economy. 

Spain’s policy interventions on the cost of living. The evidence does suggest that Spain has gone further than many European countries, and certainly further than the UK, in terms of intervening in its economy to hold down the prices of certain essentials and shield citizens from the rising cost of living. Let's have a look at some of these interventions.

  • Insulating essentials from the rising cost of living. Economist Phillipp Heimberger has highlighted that the Spanish government was quick to implement price controls in the energy and rental market early on in response to this recent wave of high inflation. A peer-reviewed study by Jorge Uxó explores these interventions: “The authorities have adopted significant measures to reduce inflation, especially in energy (capping gas in the electricity market, limiting the gas price for consumers in the regulated tariff, lowering indirect taxes, or discounts for vulnerable households) and public transport and housing rents. Other measures include transfers to the most affected households and economic sectors to offset the effects of inflation.” (See page 24 for a table detailing each policy implemented until 2022.) 

How have they impacted inflation? Spain’s President Pedro Sánchez claimed at the end of 2022 that the Spanish government’s use of various policy interventions had been successful in driving down Spain’s inflation rate to the lowest level in the Eurozone (nearly half the average, at the time), and protecting families from the cost of living crisis. 

  • …but real wages have also taken a very big hit. However, Michell has warned about fully attributing Spain’s low inflation to these progressive policies. Other, more concerning particularities in the Spanish economy are also at play, most notably the fact that Spain suffered the worst erosion of real wages of any large economy in the Eurozone over 2022. This means Spanish workers lost more purchasing power as inflation swallowed any nominal wage increases. This major erosion of real wages could explain a lot of what’s behind Spain’s experience of lower inflation, and why the government is trying to use fiscal policy to offset the impacts of inflation on workers by protecting the cost of essentials. 

Lessons for the role of the state in an insecure world. While it remains unclear whether Spain’s unconventional fiscal policies have played a significant role in keeping down its inflation, the Spanish experience does illustrate the potential for the state to play a bigger role in protecting people's disposable incomes by ensuring they can afford the basic essentials. As climate change makes extreme weather events and supply-shocks much more common (e.g the El Niño weather event is expected to re-inflate global commodity prices another couple of percent), inflation is likely to become a more permanent feature of the global economy and a much bigger ongoing problem for government policy. ‘Unconventional fiscal policies’ can prevent second-round effects of inflation moving from supply shocks and becoming embedded into other sectors of the economy, and can redistribute its impacts more fairly. With elections only a week away, we will see whether Spain’s strategy to tackle inflation is also a solid political strategy.

Weekly Updates

Energy and work

Insulating homes and creating jobs. Labour have outlined their plan to raise the standard of insulation in 19 million UK homes by investing up to £6bn a year for 10 years and enabling councils to give families grants and loans to increase household energy efficiency. Citing research from Autonomy, they say that the scheme would create 4 million job opportunities.

Industrial strategy

Industrial strategy for the defence sector. Common Wealth’s Khem Rogaly looks at who owns and profits from the UK’s arms industry and the scale of state support given to the defence sector. He argues that there is an active industrial strategy for the defence sector, which benefits its shareholders and the states the UK exports to, which can be repurposed towards socially useful production, such as green industries.

‘Crowding-in’ vs ‘crowding-out’. David Dayen, editor of the American Prospect, explains how the uptake in US manufacturing construction in the last year since the Biden administration passed the Inflation Reduction and CHIPS Act is “rapidly putting to rest” the idea that public spending ‘crowds out’ private investment.

Public services

Funding childcare properly. Responding to the government’s announcements for allocating an additional £204 million to nurseries to expand childcare places, Women’s Budget Group have calculated the funding gap remains “far short of £1.8bn we estimated was needed to make up the shortfall providers are experiencing” based on the government’s own projections.

Universal Basic Services and a sustainable economy. The Social Guarantee have released a new video explaining why collectively provided services are essential for a just transition.


The rich are calling for wealth taxes. Guy Singh-Watson, CEO of Riverford Organics and member of Patriotic Millionaires UK, invited the Prime Minister to implement a new wealth tax on people who hold more than £10 million in net assets. The Telegraph’s Peter Stanford reports: “He also demanded that Rishi Sunak and his wife Akshata Murty join him in paying the new tax so as to raise an estimated £50 billion for the hard-pressed public finances.”

Local economies and finance

Publicly-owned banks. Los Angeles’ City Council last week voted to begin the process of launching a publicly-owned bank to serve Black and Latino communities, small businesses, and fund green energy and affordable housing projects. Advocates argue that public banks serve the needs of local communities over shareholders and invest in projects normally disregarded by private investors.