The containment of budgetary imbalances is a recurring theme in the economic policy debate, and therefore its approach could seem rhetorical. Despite many warnings, deficits have been accumulating in the last decade, both in expansionary and recessionary periods, without harming the growth path. Its rationality could even be sustained, in light of the low interest rates that have prevailed until recently, and which encouraged people to go into debt to invest. On the other hand, the austerity of the time of the financial crisis has left a painful mark that lingers in the collective subconscious.
This feeling of harmlessness of the debt, however, has been based on a premise: the maintenance of exceptionally favorable financing conditions for the States. As these conditions disappear in line with the Copernican shift in monetary policy, the weight of the debt will become evident with increasing intensity.
Until the end of the era of monetary abundance, the European Central Bank (ECB) acquired practically all of the net debt issues. Furthermore, it did so at an increasingly reduced cost, with the Treasury even being able to charge for placing bills and bonds. With the return of inflation, the central bank has not only been adjusting interest rates. It also – and above all – gets rid of a part of the public securities in the portfolio. And recently it has sent a powerful message that monetary conditions will remain more demanding than initially anticipated. In other words, it is ruled out that we will quickly return to the era of negative interest rates.
Little by little, savers assimilate the ordeal, which in practice means that, with constant policies, the interest burden will increase inexorably. First, because the deficit has to be financed in the markets at a cost of around 4%—a considerable increase in cost compared to the almost zero values prior to the pandemic or even negative values just a couple of years ago. Second, we are looking at a snowball effect since the debt that comes due will have to be renewed in deteriorated conditions. Starting in January 2024, the interest rate on new 10-year bond issues will be higher than its equivalent a decade ago. Until now, the opposite had happened, that is, the new debt cost less than the old one, moderating the State’s financial costs.
Interest expenditure, which ranged between 28,000 and 31,000 million euros until last year – perpetuating the perception of debt lightness – will exceed 39,000 million in 2024 according to the Government’s Budget Plan (Funcas foresees even 1,000 million more). In a scenario without measures, the deficit will remain at high levels that leave little room to face a hypothetical shock. Compliance with European fiscal rules would also be complicated, although this is a minor consideration compared to the need to maintain a space of sovereignty to pursue the economic, social and environmental objectives of our country.
We still have a window of opportunity to embark on a path to correct imbalances. The Spanish economy is the one that is growing the most among the large ones in Europe, supported by a solid external surplus, enjoys contained risk premiums and benefits from a new round of European funds. The conditions allow us to rationalize taxation, plugging holes that reduce revenue, and evaluate spending. Subsidies, for example, have doubled to 2% of GDP in a few years. In Portugal, early and balanced action has allowed us to return to balance after the pandemic hit, without harming growth or social objectives. We can choose that route or succumb to debt light syndrome.
The cost of new public debt issues carried out by the Spanish State, or average effective interest rate, has left behind the reduced values of 0.2% in 2019 and the historical minimum of -0.1% marked in 2021 , to beat the 3.6% yield last month. Such a high average effective interest rate has not been observed since 2012. The corollary is an increase in interest expenditure by Spain: it is expected that this expenditure will reach in 2024 an amount similar to the entire investment made by the administrations, or 40% of VAT collection.
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