November 28, 2020

Spend now, but plan for future structural balance


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The Spanish economy is perhaps in the hardest time since the Civil War. With a historical fall in GDP whose level we will not recover in 2021, as the optimistic Budgets almost foresee, but within several years. And with a level of public debt that will be around 120% of GDP this year. According to the IMF, we are the advanced economy most affected by the epidemic.

And yet, in this unfavorable framework, the cost of the debt that we issue up to the eight-year term is negative. And the ten-year close to its all-time low. Perhaps Sánchez believes that it is the fruit of his management. And Iglesias that this is Jauja …

However, this interest rate prevailing in the market is artificially supported by the ECB with its purchases that, according to Bloomberg data, this year reached 12% of the GDP of the euro area and exceeded the volume of issues (10%) of all States of it. Theoretically, the ECB’s PEPP program ends in June 2021. But the second wave of coronavirus in EuropeBy anticipating a worse economic performance, it is paradoxically reducing the IRRs of bonds even more, because the markets expect even more acquisitions from the ECB.

The IMF says that the most important thing is not the volume of the debt but its cost. Which, in our case, has been going down for several years, even in absolute terms. And that, as long as there is economic growth and interest rates remain low (especially if it is higher than these), structural reforms are more urgent than deficit cuts. He is not without reason, but in Spain we do not even consider the latter. And that it has been several years since some were undertaken, although they were only half so. And this government thinks rather of counter-reforms.

If we were not in the eurozone, Spain would have already suspended payments and it would be difficult for this government to survive. But the ECB, the European Reconstruction Fund (and other EU funding sources) and the conviction that the markets (still) have that the EU will not let Spain fail keep it afloat.

However, the government seems determined to make the situation even worse and threatens us with budgets in the making that “inflate” GDP, and therefore income, the likely implication of which is to “strain” higher current spending. Further, it would be especially serious if the reconstruction fund is not well managed, which should be designed to invest in projects that improve the growth capacity of the Spanish economy, and not to spend in client destinations. It is disturbing to hear that, if it is delayed, the Government plans to issue debt, in order to spend in 2021. It sounds like a nice way to avoid surveillance and control by Brussels….

In short, let’s admit that now is not the time for austerity (although it should always be necessary to eliminate superfluous spending, which abounds in the Administration). But neither of spending without rhyme or reason, if we do not want to be forced into a forced cut plan sooner rather than later. And, of course, what we need as eating in Spain is a medium-term fiscal consolidation plan. That is, a reasonable guide on how we are going to return to structural equilibrium, in a reasonable time, from the brutal total deficit of 2020, which could be 13/14%. That is what would give us more (or some) credibility with the markets and our European partners.

“What we need like eating in Spain is a medium-term fiscal consolidation plan”

The low level of interest rates should not “encourage” the government to spend a lot but to invest well, accompanied by reforms that strengthen our economy. And of course, without making magic Budgets like what transpires from the one being designed for 2021, with unrealistic assumptions of growth and income. Because it is essential that we are able to get to the moment to face reality, when Brussels and the markets ask us to account, in the least bad conditions possible.

Carmelo Tajadura is an economist

Carmelo TajaduraCarmelo Tajadura

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