The conflict in the Middle East has proven a boon for Spain’s hospitality sector, as travellers redirect their holiday bookings from war-torn regions to the sun-drenched coasts of the Iberian peninsula. But British hoteliers and restaurateurs are raising the alarm, demanding a level playing field as Spanish rivals scoop up lucrative bookings that would once have filled British seaside towns.
Spain recorded a 12% year-on-year increase in foreign tourist arrivals in the first quarter of 2025, with the Balearic and Canary Islands leading the charge. The surge is attributed to a flight from destinations such as Israel, Egypt and Turkey, where geopolitical instability has cast a chill over the tourism industry. IATA data shows a 15% drop in bookings to these regions, with Spain picking up the slack.
Yet while the Spanish outlook is sunny, the UK’s hospitality sector is feeling overcast. “The government is dragging its feet on tax breaks and business rates relief. Meanwhile, our continental competitors are slashing VAT on tourism services,” said Simon Davison, CEO of the British Hospitality Association. “We are losing market share not because we are uncompetitive, but because the Treasury is asleep at the wheel.”
This is a classic case of fiscal policy mispricing risk. The government’s stubborn refusal to cut the headline rate of corporation tax or provide temporary relief on business rates means British hotels are pricing themselves out of the market. Capital is fluid, and it will flow to the highest after-tax return. In this case, that means pouring into Spain’s hotel real estate and leaving Scarborough and Margate high and dry.
Gilt yields have been grinding higher as investors demand a premium for holding UK sovereign debt. That tightens monetary conditions, but the real squeeze is on high-street businesses. The Bank of England’s focus on core inflation has kept base rates at 5.25%, but consumer prices in the services sector are stickier than a toffee pudding. The result is that borrowing costs for small hospitality firms are crippling, while Spanish hotels benefit from lower interest rates and generous government guarantees.
The Treasury’s response has been to point to the recent freeze on alcohol duty and the increased threshold for VAT registration. But for most guesthouses and family-run eateries, these are crumbs from the chancellor’s table. What they need is a fundamental reform of business rates, which penalise investment in property and reward structural underinvestment.
Meanwhile, the capital flight out of London and into European bond markets is palpable. The spread between 10-year Spanish and UK government bonds has narrowed to just 20 basis points, a striking convergence given the higher risk perception of the UK economy. Foreign direct investment into Spanish tourism infrastructure has surged 30% year-on-year, while similar investment in the UK has stagnated.
The Middle East conflict may be an external shock, but the UK’s inability to capitalise on it is a self-inflicted wound. The government should look to its fiscal levers: cut VAT on tourism services to 10%, provide a temporary holiday on business rates for hotels and restaurants, and offer tax incentives for capital spending on refurbishment. Without these measures, British hospitality will continue to lose the competitive edge that underpins the sector’s contribution to employment and growth.
For now, the Spanish sun continues to warm the balance sheets of Ibiza’s hoteliers, while British seaside landladies stare at grey skies and empty booking ledgers. The market is efficient in allocating capital to the highest return, and right now that return is in Madrid, not Margate. The question is whether the Treasury is willing to change its calculation.
