Squaring public accounts in a context of slowdown is like squaring the circle, especially when the central bank, focused on fighting inflation, cannot lend a hand. European governments have no choice but to correct imbalances: they are competing for the markets to buy huge amounts of government debt at an affordable price. In the coming year, the amount of euro-denominated bonds maturing amounts to around 1.6 trillion, with Spain accounting for 12% of the total. In addition to rolling over maturing bonds, governments have to cover new financing needs arising as a result of the deficit. The supply of bonds is therefore rising, while the ECB’s demand is falling, as the central bank plans to dispose of a large part of the bonds it had acquired during the period of monetary abundance and which are maturing, for a total of around 250 billion in 2024.
There is no choice but to make a restraining effort, but without greatly affecting the economy, as was the case during the financial crisis. This lesson has also been learned in Germany: faced with the disastrous impact of a strict application of the balanced budget rule, integrated into the Constitution since 2009, the coalition led by Chancellor Scholz has invoked an exceptionality clause, avoiding a cut in public spending that would be counterproductive for an economy on the verge of recession.
The Spanish economy, for its part, continues to grow, which facilitates consolidation. It seems feasible not to roll back part of the anti-inflation package that expires at the end of the year. This includes the cuts in energy VAT, excise taxes on electricity and other measures to reduce the energy bill in force since the outbreak of the war in Ukraine, amounting to an estimated 7.5 billion euros. These measures are not targeted at vulnerable groups, resulting in an unnecessary waste of resources. Moreover, the energy outlook does not justify their maintenance. Energy prices have moderated and both the forward markets and the International Energy Agency’s forecasts point to stabilization. The oil supply cuts announced by OPEC do not seem to be having an effect, and the risk of an abrupt rise in the price of a barrel of Brent seems to be receding for the time being.
The VAT cuts on certain foodstuffs are also of a general nature, which suggests that they should disappear in the medium term, but in this case price trends remain adverse, making it necessary to weigh up the decision. The food CPI continues to advance at a high rate, and leading indicators point to persistent pressure in the coming months. The food ex-factory price index, after a brief pause, is back on an upward trend (perhaps due to the delayed effects of the drought).
The rethinking of anti-inflation measures may help to meet the more immediate objective of bringing the deficit down to close to 3%, and thus facilitate debt financing in the markets. But the structural hole will persist, requiring a prolonged effort of expenditure rationalization and fiscal reform.
Brussels can also play a leading role, not limited to the deployment of Next Generation funds or the monitoring of deficits. The latest tax collection reports from the OECD and the Commission itself highlight the lack of tax harmonization at the European level. The result is a significant loss of public revenue for the Union as a whole and a distortion of competition, which is burdensome for most European companies. Unfair tax competition is not only detrimental to compliance with tax rules, it is also inconsistent with the declared objective of strategic autonomy.