Which European countries are seeing taxes outpace real wage growth?

Euronews

2 days ago

Among the 27 European countries covered in the OECD's Taxing Wages 2025 report, seven recorded a decline in real post-tax income in 2024 compared to 2023 for the average single worker without children.
This measure reflects the amount of money left to spend or save after taxes are deducted and inflation is taken into account. The countries affected were Italy, Estonia, Czechia, France, Greece, Belgium, and Spain.
In Italy, the average wage increased by 3.9% in 2024. With inflation at 1.2%, this translated to a real wage growth of 2.7% before taxes. However, the personal average tax rate—which includes both personal income tax and employee social security contributions—rose sharply by 7.5%. This created a significant gap between real wage growth and the increase in personal taxation, ultimately eroding much of the benefit from higher wages.
Cristina Enache, global tax economist at the Tax Foundation, emphasised the impact of increased social security contributions.
While this highlights a growing gap between wages and taxation, it doesn't directly reveal how much real post-tax income changed.
Personal average tax rates also increased by more than 4.5% in Estonia and Czechia, leading to lower real post-tax incomes in 2024, as real wage growth did not keep pace.
Enache of the Tax Foundation noted that in Estonia, the tax burden rise was driven by the removal of certain tax allowances. In Czechia, the increase was primarily due to higher social security contributions from either employees or employers.
In France, real wages grew by 0.7%, but the personal average tax rate increased by 1.7%, resulting in lower real post-tax incomes compared to 2023.
During this period, Portugal, the UK, and Turkey recorded the highest increases in real post-tax incomes. In Portugal, the personal average tax rate fell by 8%, while real wages grew by 4.7%.
'Portugal reduced its income tax rates for the first six tax brackets, reducing the overall tax wedge for the average income earner,' Cristina Enache told Euronews.
In the UK, the average tax rate dropped by 8.7%, although real wage growth was modest at 1.6%.
In Turkey, despite a 3.9% increase in the personal average tax rate, a substantial 15.5% rise in real wages led to significantly higher real post-tax incomes in 2024 compared to 2023. However, some critics have accused the national statistical office of manipulating inflation figures.
Cristina Enache explained that "real post-tax income" refers to the income a person takes home after taxes, adjusted for inflation.
'A lower real post-tax income means that after taxes and inflation, the individual has less money to spend. Therefore, a decrease in the real post-tax income between 2023 and 2024 means that the worker earning the average wage is losing purchasing power,' she said.
'Bracket creep' occurs when income growth causes individuals to pay higher average income tax rates over time. This typically happens when inflation pushes taxpayers into higher tax brackets or erodes the value of tax credits, deductions, and exemptions. According to the Tax Foundation, 'bracket creep' leads to higher income taxes without any real increase in income.
'Indexing the income tax (and, depending on the design, the social security contributions) to inflation would avoid bracket creep and could mitigate the decrease in real post-tax income for workers,' Enache pointed out.
The Euronews article titled 'Where did real wages rise and fall the most in Europe in 2024?' takes a closer look at how wages changed compared to 2023—examining nominal increases, inflation, real wage growth, and average salaries.
The HCOB Eurozone Manufacturing PMI for May 2025 was 49.4, up from 49.0 in April, according to S&P Global. However, this is still in contraction territory, as it was below 50, and marked the slowest pace of contraction in the manufacturing sector since August 2022.
Meanwhile, output rose for the third month in a row, with new orders stabilising after almost three years of decline. The rate of backlog depletion also dropped to the slowest pace since June 2022.
On the other hand, employment levels continued to lag, although they decreased at the slowest rate since September 2023.
Input costs fell for the second consecutive month, which was the fastest decline in 14 months, while output prices slid for the first time since February this year.
Business confidence rose to the highest level in more than three years in May.
Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said in the May Eurozone PMI report: 'The upward trend in the headline PMI is still continuing, pointing towards a recovery that is progressing. That is backed up by the rise in production we have seen since March.
'What is especially encouraging is that production has picked up across all four major eurozone economies, which really highlights how broad-based this recovery is. With output rising for three months in a row, historical patterns suggest there is a 72% chance we will see another increase in the next month.'
However, he highlighted that the possibility of the US imposing steeper tariffs against the EU is a major risk to this outlook.
'Still, companies are noticeably more upbeat than they were last month about producing more a year from now, which shows a certain resilience, even in the face of potential protectionist moves from across the Atlantic,' de la Rubia added.
Falling oil and gas prices and lower interest rates supported the eurozone manufacturing sector in May, with production rising in France, Germany, Spain and Italy.
The HCOB Spain manufacturing PMI for May was 50.5, a jump from April's 48.1, according to S&P Global. This was ahead of analyst expectations of 48.4. After three straight months of contraction, this was the first expansion in the Spanish manufacturing sector, while also being the highest number since January.
May's higher figure could be because of underlying demand improving slightly. While uncertainties affected the sector significantly in April, the market seemed to readjust a little in May.
Spanish manufacturing sales volumes fell in May, however, the decline was the smallest in four months. Companies continued to hire for the third consecutive month, while input costs fell for the first time since the beginning of last year.
Output prices also dropped at the fastest rate since September 2024, mainly due to higher market competition. Similarly, output sentiment for the next 12 months rose to a three-month high.
Jonas Feldhusen, junior economist at Hamburg Commercial Bank, said in the May Spain PMI report: 'Spain's manufacturing sector sent encouraging signals in May. Whether this improvement is partly attributable to early signs of easing in the global tariff conflict remains uncertain.
'While Spain's direct dependence on the U.S. market is relatively limited compared to countries like Germany or Italy, indirect effects from a generally improved global trade outlook may also be contributing.'
The HCOB Germany manufacturing PMI for May came down to 48.3, down from April's 48.4, according to S&P Global. This was the 35th month in a row of contraction in the German manufacturing sector, although output advanced for the third month in a row.
Manufacturing output was mainly supported by rising export orders from the US and Europe, although overall new orders still fell marginally, dampened by lagging domestic demand.
Job cuts slowed to the weakest pace since January 2024, with input stock declines and purchasing activity decreases also slowing.
Input prices continued to fall, dragged down by lower oil prices, lagging demand and a stronger euro. Robust competition led to more factory gate price cuts in May, while optimism about future output soared to the highest level since early 2022.
Dr. Cyrus de la Rubia noted in the May Germany PMI report: 'Most people have got so used to gloomy headlines from the industrial sector that the good news often slips under the radar. That is why it is worth looking beyond the headline PMI figure, which dipped slightly and is still in contraction territory. The broader picture actually shows some encouraging signs.
'Production has now increased for the third month in a row, and foreign orders have been on the rise for two straight months. What's more, the uptick in output is not limited to just one area – it is showing up across the board, in capital goods, intermediate goods and consumer goods.'
He further noted that business sentiment may be optimistic due to the formation of a new government, along with a large infrastructure package, the promise of tax breaks and plans to increase defence spending.