In today’s Finshots, we talk about the Spanish Christmas Lottery, and tell you how it boosts the country’s economy while offering some interesting economics lessons.

But here’s a quick side note before we begin. Starting tomorrow, we’re taking a short holiday break until the 1st of January 2025. So, you won’t have any new stories from us for a few days. But don’t worry. Until then, we’ll mail you some of our best articles from 2024. And we hope it’ll make up for our brief absence. With that out of the way, let’s dive into today’s story.

The Story

Popcorn is causing quite the stir in India! A 5% GST (Goods and Services Tax) on non-branded popcorn, 12% on branded ones and a steep 18% on caramel popcorn, thanks to the added sugar, has left everyone annoyed. It’s got people wondering why taxes feel more like a punishment than a way to boost the economy.

But what if there was a method to raise taxes without people even realising it?

As a matter of fact, there actually may be. Enter lotteries. A lottery is a system where people buy tickets for a chance to win prizes. But here’s the thing. After distributing the prize money, whatever’s left from ticket sales becomes the organiser’s income.

Now, imagine if the organiser was the government. By running the lottery, it could use the leftover funds to plug budget deficits or finance important public projects. People get to enjoy the thrill of winning, and the government raises funds, without sparking outrage. Seems like a win-win, doesn’t it?

And this isn’t some random thought we pulled out of thin air. It’s something Spain has done every Christmas for over two centuries.

Every year, in the days running up to Christmas, Spain gears up for the world-famous “El Gordo” lottery, run by the government’s national lottery company. Literally translating to “The Fat One” this isn’t your regular lottery. Lotteries normally have one big winner and a handful of smaller prizes. But El Gordo is different.

It has a massive prize pool, with the prize money split among people who buy parts of the same ticket. So, families, friends or co-workers, often from the same village or neighbourhood, get to share in the winnings if they buy the lucky one. It’s like an entire community winning together!

And the winnings can be massive. For context, a standard €20 ticket can win €20,000 for each euro played if it hits the top prize. Even the second and third prizes offer impressive returns of €6,250 and €2,500 per euro, respectively.

This year, the prize pool was €2.71 billion, a little more than last year’s €2.59 billion. And a few days ago, the top prize of €4 million was shared across 193 tickets. Over half of it went to a basketball club in Madrid, while a big chunk of the rest went to communities in Logroño, a city known for its wine. And since tickets can be split into 10 parts, each winning group ended up with around €400,000.

And thanks to this massive prize pool, El Gordo isn’t just a fun holiday tradition or the world’s longest-running lottery; it’s also the biggest lottery on the planet and an economics lesson too!

If you’re wondering how, well, it all started back in 1812 as a way for Spain to raise money for troops fighting against Napoleon. Because obviously, taxing citizens during a war isn’t a great idea. So, a lottery was just a clever way to fund the war without causing too much frustration among the people.

Over the years, El Gordo became such an iconic part of Spanish culture that the government kept it going and even used the proceeds for social causes and national projects, after paying out the prize money and covering costs. After all, it makes up about 0.3% of the government’s total revenue.

But that’s only half the story. El Gordo doesn’t just fund development, it also gives a huge boost to the Spanish economy. How’s that, you ask?

Well, one answer is simply something called an income shock. You see, almost everyone participates in El Gordo since it’s a beloved Christmas tradition. And on average, the lottery creates an impact worth about 0.2% of Spain’s GDP. But in provinces where the big prizes land, it can jump to nearly 3% of the local economy!

And the optimism that comes with winning, sparks a spending spree. People in the winning region start spending more, with mostly the younger crowd splurging on things like furniture, vehicles and motorbikes.

But the impact doesn’t stop at consumption. It also triggers a drop in unemployment, at least in the short term. For context, a study by the Centre for Economic Policy Research found that unemployment can drop by 0.1% to 0.3% about 14 months after a region wins. And this decrease can last for about two years before going back to normal. Besides, during tough times, like a recession or even the pandemic, the effect is even stronger. Unemployment can fall by as much as 0.5%, even though it could take up to 2.5 years for this full effect.

The reason is simple. Lottery winners who were earlier used to saving for a rainy day start spending their money instead. This reduces their precautionary savings. And the increased consumption creates a ripple effect. Businesses start popping up to meet the new demand, leading to more jobs and lower unemployment in the process. And since El Gordo rolls around every year, this cycle of economic boost keeps repeating, year after year.

But, of course, there’s a catch. El Gordo can also open the door for money launderers looking to clean up their illegal cash. And that’s because in Spain, lottery winnings are tax-free up to €40,000. This makes winning tickets pretty irresistible for people trying to hide dirty money.

These smart folks approach legitimate lottery winners and offer to buy their winning tickets for more than what they’re actually worth. Let’s say a ticket is worth €1 million. A money launderer might offer the winner €1.1 million instead. The winner gets more money than they initially won, while the launderer now has a clean ticket to explain their sudden wealth. They could simply claim that it came from the lottery.

So, while the lottery is a great way to boost the economy and spread festive vibes, it also has a darker side that could drain money from the government’s pockets.

Now, imagine if a country like India introduced a traditional lottery like El Gordo every year. Not only could it help cover budget deficits and fund development, but it could also work wonders since lottery winnings in India are taxed at a flat 30%.

So, what do you think? Should India take a page from Spain’s playbook instead of focusing on raising taxes on stuff like popcorn, which hardly make a dent in tax revenues?

We’ll let you think about that. Until then…

Happy holidays, folks!

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