One of the peculiarities of the current monetary cycle is its limited impact on public finances. This is how most indebted States manage to finance themselves without having to bear a risk premium exacerbated by the withdrawal of central banks (except in times of financial stress). os). But be careful, because this privileged situation…
One of the peculiarities of the current monetary cycle is its limited impact on public finances. This is how most indebted States manage to finance themselves without having to bear a risk premium exacerbated by the withdrawal of central banks (except in times of financial stress). os). But be careful, because this privileged status is disappearing.
In recent days, savers, angered by the high turnover of the Italian budget hole, are reluctant to finance the Meloni Government’s tax-cutting projects, which are considered inconsistent with one a worse context due to the large public deficit (8% of GDP in 2022). Germany’s yield differential (or risk premium) on transalpine debt has tightened by nearly 200 points, almost 50 points more than when the ECB began its tightening turn. Markets also reacted to the Macron government’s budget plans. The risk premium on French debt continues the negative slope seen since the start of the inflationary outbreak. In addition, both economies have symptoms of anemia, the Italian is even on the edge of recession, and therefore threatens to reject tax revenue forecasts.
On the contrary, Portugal took advantage of the period of recovery to balance its accounts and consolidate a budget path aimed at solving major economic, social and environmental challenges, without compromising the financial sustainability of the finances of the public. The deficit is ridiculous and the debt is one of the few in Europe that is clearly below pre-pandemic levels. Unsurprisingly, the risk premium, which exploded during the financial crisis, is developing favorably and seems to be unaffected by market fluctuations.
Spain, for its part, is in an intermediate position, thanks to the relative stability of the economy in the face of the double energy and monetary shock. Revenues are boosted by growth, also by CPI due to the non-incorporation of inflation in tax rates, so a slight reduction in the deficit for this year is not 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 the fiscal path will take.
For now a calm prevails. However, the recent experience of neighboring countries reveals three facts of the budget policy to be considered in the current context of inflation, energy transition and the return of fiscal rules. First, deviations will be punished more strongly than during the time of monetary abundance and anesthetized interest rates. Sticking to the deficit target last year and up to this year is a step in the right direction, but let’s not forget that we owe it in part to the good performance of the economy. It will be more difficult now because the slowdown is expected. The reduction in VAT collection (-10.4% in August in interannual terms) is a premonition of a change in trend.
Two, greater concentration and targeting of anti-inflation aid is possible. There is no justification for continuing to reduce the tax on gas and electricity consumption, now that prices have stabilized. And, due to the rise in oil prices, it is better to avoid general subsidies for fuel consumption: it is better to think about help for vulnerable groups and transporters who cannot pass on the increase in costs to customers.
Finally, the stimuli can only come from European funds. It is also the ideal instrument for changing the productive fabric, hence the importance of easy access to loans available within the program. All this, along with the new PGE, will build the sustainability of our welfare state.
Deficit
The consolidated deficit of administrations (excluding local ones) reached 2.2% of GDP through July, three tenths more than a year ago. This deterioration is due to the slowdown in budget revenue: it grew at an annual rate of 6.5%, half of last year. In addition, public spending follows a trend of 7.4% until July, four times more than in 2022. For the full year, the deficit could approach the target of 3.9% under reasonable growth assumptions. positive until the end of the year.
