July 14, 2020

The state hole: 25,000 euros per Spanish

The Institute of Economic Studies warns that taxing companies more will not reduce the deficit and that more debt will stifle growth. Public debt already engulfs 6% of revenues

«We are concerned about the policy of the future Government if it is tending to increase public debt. I hope it does not go the way of raising taxes because it drains economic growth ». This is how blunt was the president of the Institute of Economic Studies (IEE), Íñigo Fernández de Mesa, during the presentation of the study "Public debt in Spain", whose conclusions raise doubts about the economic policies that the future PSOE-Podemos Government can Start up if you finally achieve the endowment. The warnings of the IEE are very clear: the high level of indebtedness, located in 97.7% of the GDP – it already suffers negative effects from 90% of the GDP -, subtracts resources from the public system, since it becomes destined to this effect up to 6% of budget revenues, so it negatively affects economic growth. Therefore, the report warns that "it is a priority to return to economic and fiscal orthodoxy to ensure that the public debt is at a sustainable level." It also calls for reforms that increase the growth of the economy through a "credible fiscal consolidation," based on the "containment of public spending." But he claims that this consolidation be done "without raising taxes", since greater fiscal pressure directly affects growth because "it ends up generating more public debt." Specifically, it warns that it can subtract up to 2.5 points from GDP in the next five years. Fernández de Mesa wanted to give a touch of attention to the possible turn of the economic policy that the future social-communist government can take and stressed the need to recover the containment of spending in relation to income. "Deferring the need to balance accounts means postponing the problem at the cost of having a more serious one in the future."

This report, carried out jointly between the IEE and the French Molinari Economic Institute, seeks to "make visible the problem of excessive indebtedness accumulated by public administrations" of European countries. And, in the particular case of Spain, it set the date at which all public administrations exhausted their fiscal resources to finance the expenditure: on December 9, 2018, known as the Debt Day. Since that day, all public spending had to be paid with debt issuance until the end of the year. And, if no corrective action is taken, this date can be extended every year. The average of the Debt Day of all EU public administrations was on December 25, 16 days less than Spain, so they only had to cover with money borrowed six days. For the IEE, Spain presents a “very worrying” deficit scenario, since in addition to being among the countries with greater fiscal imbalance and with a higher debt, “it has hardly experienced any improvement in the last two years”. He especially criticizes that, despite the fact that fiscal revenues have been at “historical highs,” the lack of efficiency in spending maintains “a permanent mismatch of public accounts,” which raises the debt to around 100%, and that The study quantifies in more than 25,000 euros per inhabitant.

It is precisely in this section, that of fiscal pressure, in which the IEE is particularly concerned. Understand that the effect produced by the increase in taxes is not directly related to the reduction of spending, since as taxation rises there is a negative effect on growth and investment, around half a point of GDP at year on growth and one point on private investment in each year. Given the possibility that the future Government may carry out tax increases, – 15% in Corporate Income Tax, on personal income tax, those related to capital income and social contributions – warns that doing so will have a more negative effect. on the growth that if it is done on indirect taxes, which cause less distortion on the system. Another of the big holes that the IEE warns about is pensions. The slowdown in employment, the lack of reforms and the demographic aging will cause this indicator to continue deteriorating, generating new burdens and damaging the future sustainability of the pension system. Finally, it warns of anesthesia and the false confidence that the ultra-expansive monetary policy of the European Central Bank can create, which has provided liquidity, low interest rates and purchase of sovereign bonds. "They have contributed to the fact that debt financing costs are historically low and caused the current relaxation in debt control."

. (tagsToTranslate) Macroeconomics

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