Five facts about public debt that the right ignores

The publication this Wednesday of the record of 1,457 billion debt of the Public Administrations, at the end of June, served the most ominous voices of the right to harshly criticize the Government. These catastrophic reproaches, many from the PP, collide with the economic reality of Spain, very far from the cataclysm.

When the president of the Community of Madrid, Isabel Díaz Ayuso, laments on her Twitter account the "more than 250,000 million debt added in three years", and ironically describes it as "Sánchez's legacy", she ignores the historic effort in public spending that the pandemic demanded, and the collapse of income and activity, and that now the war demands, throughout Europe. She also that, even so, this absolute figure, the maximum of 1,457 billion euros, fell from 117% of GDP for the first time since 2020 due to the economic recovery and inflation. In the first quarter of 2021 it exceeded 125%.

The catastrophism about Spain's exit from the crisis ignores hateful comparisons, such as the one highlighted by the First Vice President and Minister of Economic Affairs, Nadia Calviño, in response to the statements made by the PP president, Alberto Núñez Feijóo, about the "pufo" that the Government has left the Spaniards. "We have increased the public debt to save citizens, jobs, the income of families and companies, the Popular Party exponentially increased the debt to save banks [tras la crisis de 2008]", he claimed.

Regarding this comparison, it should be remembered that the origin of both crises is very different. And that the community response has been antagonistic, with the European Central Bank (ECB) and the European Commission developing on this occasion expansionary policies that are far from the austerity that followed the euro crisis and, precisely, lowering the cost of debt to favor the financing of historical deficits (the difference between public spending and income).

The doomsayers are not looking around either: all the large economies in the eurozone have increased their debt in absolute terms and in relation to GDP since 2019. Even practitioners convinced of fiscal discipline, such as Germany, have raised it to finance the ERTE, the aid, tax cuts or subsidies to counteract the escalation of energy, to directly support companies or to finance measures such as the Minimum Vital Income (IMV).

With data from the first quarter of this year, the main economy of the European Union (EU) had raised its debt by almost 440,000 million euros since before the Covid shock. France, at about 530,000 million. Italy, at 345,000 million.

And despite having already recovered the economic activity prior to the pandemic, in Germany the debt compared to GDP was close to 70%, from 58.9% in 2019. And in France to 114.4%, from 97.4 % of 2019. While in Italy this ratio, one of the main ones to measure the sustainability of the debt, rose to 152.6%, from the pre-pandemic 134.1%.

In Spain, where full recovery is not expected until 2023 or 2024 due to the slowdown caused by the Russian invasion of Ukraine and runaway inflation in an economy that suffered a major blow in 2020 and whose reconstruction depends on tourism and other services that it took longer to shake off the consequences of Covid, the debt fell in June below 117% of GDP for the first time from September 2020.

Indebtedness stood at exactly 116.8% due to the increase in economic activity and inflation. And the Government is confident that "the trend of recent quarters is compatible with the forecast of a public debt ratio of 115.2% of GDP made in the Stability Program last April."

“The reduction in the public debt ratio has continued thanks to the acceleration of economic growth, also taking into account how advanced the financing program of the Treasury of the Kingdom of Spain is for the year 2022 [con un objetivo de emisión neta de deuda de 75.000 millones]”, assures the Ministry of Economic Affairs.

"To date, 69.2% of the total emissions program for this year has been executed," they add from the institution headed by the first vice president Nadia Calviño. The Treasury has stepped on the accelerator in the first part of the year in the issuance of debt with which public spending that exceeds income (the deficit) is financed. And it has done so to take advantage of extraordinary financing conditions that have been exhausted after the increase in official interest rates by the ECB in July to stop feeding inflation.

In this process, our country has been issuing since June —taking into account all maturities— at a cost higher than the average interest rate of all outstanding debt, which in recent years has fallen to historical lows, according to Treasury statistics.

Despite this increase in the cost of financing in recent weeks and although, for this reason, the average interest rate will inevitably rise, the conditions remain very good.

So, the interest bill that the State faces each year will increase, but expectations point to this bill barely detaching itself from 2% with respect to GDP, and that it will remain far from the 3.5% of 2013, after the euro crisis (see chart).

The ECB intensified the expansionary monetary policy with the shock of the Covid pandemic, but the institution has been forced since the end of 2021 to gradually withdraw this extraordinary stimulus, which consisted of lowering official interest rates to historical lows and creating thousands of millions of euros to buy debt from states and companies to guarantee market demand, according to certain conditions.

Thus, it now faces the difficult challenge of tightening financing conditions across the board to stop feeding runaway inflation without particularly harming the countries with the most fiscal imbalances. Among them, Spain itself, and Portugal, Greece and Italy follow. To this end, the ECB is deploying new mechanisms (here they are explained), for the moment without conditionality. That is, the monetary support continues.

If conditionality arrives to maintain this support, it would be set according to the deficit objectives, which are also key for the evolution of indebtedness. Recently, the Minister of Finance, María Jesús Montero, once again reaffirmed the Government's deficit path. According to her objective, the gap between expenses and income will be 5% in 2022 and will be reduced to 3.9% in 2023.

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