May 15, 2021

Sánchez will have a legislature end marked by the deficit adjustment




An unwritten roadmap of the rulers in Spain is that it is convenient to make the adjustments at the beginning and save the fiscal gifts to end the legislature with a good taste in your mouth and near the ballot boxes. However, the epidemic has devastated even this maxim and the Prime Minister, Pedro Sánchez, will have to face a legislature in which the order of the factors will be altered and, predictably, adjustments should reach the end of the term. The Reconstruction Fund will deploy 140,000 million for Spain, of which 72,700 will be in the form of transfers. Conditionality comes through the specific recommendations that the European Commission makes through the European semester. And in the last one, Brussels already gives a clue that, with the economy (and health) in a delicate state, will not require adjustments this year or next, but it will be necessary to set the stage for when the activity has recovered sufficiently and it is necessary to clean up public accounts in critical condition.

«When economic conditions allow, apply fiscal policies aimed at achieving prudent fiscal situations in the medium term and guarantee the sustainability of the debt, at the same time that investment is encouraged, “asked the Commission in its individualized recommendations by country last May.

Brussels activated the safeguard clause of the Stability Pact to avoid applying fiscal rules this year – those that set limits of 3% of GDP deficit and 60% of public debt – and it does not seem that it will apply them next. However, the Independent Authority for Fiscal Responsibility (Airef), has already warned the Government that it will be convenient prepare the ground for adjustment by 2022, when it will be necessary to start adopting measures to reduce an imbalance that this year the Executive expects will end at 10.3% of GDP – although the Bank of Spain warns that if there is a regrowth it will go to 14% – and a debt that it will multiply from 95.5% to 115.5% – although the supervisor estimates that, in a more negative scenario, it can escalate to 126.7% -.

The last recommendation that came to Spain in the European semester before the pandemic broke out in 2018, asked the Government to limit the rise in spending to a maximum of 0.9% and an annual structural adjustment of 0.65% of GDP: in 2019 the first rose by 4.4% and instead of adjusting the 8,000 million that Brussels was asking for, the deficit increased by another 8,000 million. And when Spain had a deficit above 3%, as will happen now, what was the European Commission asking for? When we were in the Excessive Deficit Procedure, the last Brussels recommendation of 2017 called for “taxes on pollution” and reminded the Government of the collection gap that the VAT had with the EU average because “Spain applies exemptions or reduced rates very widely”.

VAT entered 6.6% of GDP in 2018 compared to 7.1% for the continental average. And although in personal income tax the gap is greater (9.7% of GDP compared to 12.2% in the EU), experts agree that direct taxes do more damage to activity than indirect taxes. In Companies, the distance is the smallest of all (2.5% of GDP in income compared to 2.7% in the EU): that is, the tax increase that the Executive defends is not the one that Europe recommends.

Brussels’ requests are rather directed at evaluating public spending and tax exemptions, as Airef has done in a study that it begins to present just today. On 13 tax benefits that subtract 35,000 million in income in VAT, personal income tax; Societies and Specials; in addition to evaluating 16,000 million pharmaceutical spending, incentives for contracting and infrastructure that represent 4% of GDP. Some ideas that the Treasury has already announced that it will incorporate into the accounts of the coming years. The Budgets that will test the coalition Government will not be those of 2021, but those that include the first adjustments.


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