The president of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, appeared this Monday at the Finance Committee of the Congress of Deputies to explain the Report on the Stability Program Update, published by the Institution in the month of May. Since the Report was published, new measures have been approved that will mean an increase in the deficit in 2022 of 0.5% of GDP over the previous forecast. In total, the cost of this new package of measures is 6,989 million euros.
The measures to alleviate the effects of the energy crisis represent an increase in the deficit of 1% of GDP in 2022. AIReF quantifies the extension of the tax reductions on electricity, extended with the reduction five plus points, up to 5%, of the VAT levied on the electricity bill.
Herrero considers that the macroeconomic scenario of the Stability Program “is feasible”, which is why he endorsed it on April 29. In fact, “the differences between the macroeconomic scenario of the Government and that of AIReF are very small”, according to AIReF.
Among the risks for the economy, the president of AIReF highlighted “the pandemic, China’s COVID zero strategy; the invasion of Ukraine; bottlenecks, the scarcity of raw materials and the energy crisis; the execution of the Recovery, Transformation and Resilience Plan; and a greater intensity and persistence of inflation, which can generate a loss of competitiveness and second-round effects, as well as a greater tightening of monetary policy.”
Since the Report was published last May, “there is no sign of a reduction in risks, and some are even materializing. In particular, pressures on global value chains persist and the intensity of inflationary pressures leads markets to anticipate a faster and more intense normalization of financing conditions”. Inflation, furthermore, “is being transferred to the entire consumption basket, without observing at the same time an intense transfer to the wages of the agreement”. However, “there are elements that point to the possibility of a scenario with persistent wage inflation.”
In the fiscal area, AIReF estimates “a reduction in the deficit of the Public Administrations throughout the period until it reaches 3% of GDP in 2025”, one tenth higher than that collected by the Government, which maintains the reference rates of a year ago despite a much more favorable than expected 2021 closing. Specifically, AIReF estimates that “in 2022 there will be a strong reduction in the deficit due to the withdrawal of COVID measures and the economic recovery. In 2023, the reduction will be moderate and in 2024 and 2025 there will be a slowdown in the reduction of the deficit.
Public debt “will fall in the forecast horizon (2022-2025) thanks to nominal growth, which will be the main factor in reducing debt in the short term.” The deflator will have a very notable contribution while the public deficit will continue to contribute to the increase in debt. AIReF projects a “reduction in the debt-to-GDP ratio of 9.6 points in 2025, to 108.8%, and considers the Government’s projection in the Stability Program feasible.”
AIReF formulates a new recommendation on the need to “allocate the income that materializes above what is expected and those of a temporary nature to accelerate the necessary reduction of the structural deficit and avoid increases in spending or reductions in income of a structural nature that do not count with structural financing as well”. And another recommendation on the importance of “assessing the impact of the measures already adopted in terms of efficiency, effectiveness and redistributive impact before, if necessary, deciding on their possible extension.”