One of the peculiarities of the current monetary cycle has been its limited impact on public finances. This is how the most indebted States have been able to finance themselves without having to bear a risk premium exacerbated by the withdrawal of central banks (except in times of financial stress). But be careful, because this privileged circumstance is fading.
In recent days, savers, upset by the sharply upward revision of Italy’s budget hole, have been reluctant to finance the tax cut projects of the Meloni Government, considering them incoherent with a very degraded context in light of the large deficit public (8% of GDP in 2022). The yield differential with Germany (or risk premium) of the transalpine debt has tightened and is close to 200 points, almost 50 points more than at the beginning of the ECB’s restrictive turn. Markets have also reacted to the Macron government’s faltering budget plans. The risk premium on French debt continues the unfavorable slope detected since the beginning of the inflationary outbreak. Furthermore, both economies present symptoms of anemia, the Italian one even bordering on recession, and therefore threatening to throw off tax revenue forecasts.
Conversely, Portugal has taken advantage of the recovery phase to balance its accounts and consolidate a budgetary path that aims to address the major economic, social and environmental challenges, without compromising the financial sustainability of public finances. The deficit is ridiculous and the debt is one of the few in Europe that is already clearly below pre-pandemic levels. Without surprise, the risk premium, explosive during the financial crisis, is evolving favorably and seems immune to market fluctuations.
Spain, for its part, is in an intermediate position, thanks to the relative resilience of the economy in the face of the double energy and monetary shock. Revenues have been boosted by growth, also by the CPI given the non-incorporation of inflation in tax rates, so that a slight reduction in the deficit for this year cannot be ruled out. On the other hand, the political interim prevents the presentation of budgets, so that – unlike the community partners – the markets do not have updated signals of the direction that the fiscal path will take.
At the moment a certain calm prevails. However, the recent experience of neighboring countries reveals three realities of budgetary policy to take into account in the current context of inflation, energy transition and return of fiscal rules. One, deviations will be sanctioned more forcefully than during the era of monetary abundance and anesthetized interest rates. Compliance with the deficit objective both last year and so far this year is a step in the right direction, but let us not forget that we owe this in part to the good performance of the economy. We are going to have it more difficult now that a slowdown is anticipated. The drop in VAT collection (-10.4% in August in interannual terms) is a premonition of the change in trend.
Two, greater concentration and targeting of anti-inflation aid is possible. There is no justification for maintaining tax cuts on gas and electricity consumption, now that prices have stabilized. And, given the rising price of oil, it is advisable to avoid generalized subsidies for fuel consumption: it is better to contemplate aid for vulnerable groups and transporters who cannot pass on the increase in costs to customers.
Finally, stimuli can only come from European funds. This is also the ideal instrument for transforming the productive fabric, hence the importance of promptly accessing the loans available within the program. All of this, together with new PGE, would establish the sustainability of our welfare state.
The consolidated deficit of the administrations (except local ones) reached 2.2% of GDP until July, three tenths more than a year before. This deterioration is due to the slowdown in budgetary income: these are growing at an annual rate of 6.5%, half that of the last year. Furthermore, public spending follows an inverse trend, with an increase of 7.4% until July, four times more than in 2022. For the year as a whole, the deficit could approach the target of 3.9% under reasonable growth assumptions. positive until the end of the year.
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