Budgets in times of inflation

In an environment plagued by uncertainties and with a central bank focused on fighting inflation, the orientation of our fiscal policy is of paramount importance that leaves no room for error.

Proof of this, the near financial crisis unleashed by the recently inaugurated British Government and its stimulus plan based on generalized tax cuts.

The reaction of the markets has been virulent, given the prospect of an explosion of debt and additional increases in interest rates to placate the anticipated inflationary pressures as a result of the plan itself.

It is true that the room for maneuver has narrowed in all economies, due to the escalation of supply costs that constrain the productive apparatus, especially industry.

This is a context that lessens the tractor effect of budgetary stimuli (the so-called fiscal multiplier).

On the other hand, the financing of the deficit has become more expensive after several monetary turns of the screw.

Gone are the sweet days when we could go into debt and at the same time reduce financial burdens.

For 2023, even under the assumption of a pause in rate hikes starting next spring (something that would leave the 10-year bond at 3.5%), an increase in interest payments on our superior debt is expected to 4,000 million euros.

All of this calls for containment of the recurrent deficit, that is, discounting financial charges and the effects of the cycle.

However, as the OECD recalls in its latest perspectives, the context also requires a double effort.

One, to support the productive transition and energy saving to gradually reduce dependence on fossil fuels.

And two, ease the impact of the

inflationary in the most vulnerable groups and in the companies most exposed to the energy crisis, under penalty of exacerbating social unrest and exacerbating the risk of recession and rising unemployment.

A massive loss of jobs, as happened in every recession our country faced before the pandemic, would be particularly damaging to households and businesses that have taken on variable-rate debt.

We will therefore have to be attentive to the proper functioning of the employment devices provided for in the labor reform.

All in all, budgetary policy faces the task of containing recessive pressures and at the same time putting the accounts on a path of correcting deficits, so that financing costs do not skyrocket.

An equation that is difficult to solve, especially given the starting level of debt, and our inability to reduce it during the expansion stage prior to the pandemic.

Furthermore, with a CPI at 10% in the eurozone and almost 11% in Germany, there is no longer any doubt that the ECB will once again adjust its interest rates sharply upwards, despite the looming European recession (hopefully do not also decide to sell portfolio bonds).

However, we also have opportunities such as less dependence on Russian gas.

And the abundance of European funds, although their driving potential depends on focusing on investments that dissolve bottlenecks and transform the energy model.

Otherwise the funds would only exacerbate inflationary pressures.

Another factor is the moderation of the CPI registered last month: if a de-escalation takes hold, it would stop the loss of purchasing power and help to unclog dammed consumption (the revised data from the INE point to a cushion of oversaving much higher than the initial estimate).

In short, be careful not to waste time on distractions.

The road goes through budgets focused on the needs arising from the energy and supply crisis,

Saving

According to revised data from the INE, the savings generated by families during the pandemic rose to 134,000 million euros, that is, 40,000 more than initially estimated.

This important review shows that the cushion available to households to deal with the loss of purchasing power caused by inflation is greater than previously believed.

The revision has not been the result of a lower level of consumption than previously estimated, but of a volume of disposable income higher than the figures initially calculated for 2020 and 2021. 

Raymond Torres is director of the situation at Funcas.

On Twitter: @RaymondTorres_.

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