If the deficit soared in 2019, what will come next?

If the deficit soared in 2019, what will come next?

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The problem is how the worsening trend in public finances will be reversed, when it hits.

The health crisis of the coronavirus and its serious economic repercussions are focusing attention and, as a consequence, it seems that some questions remain in the background, which, although not currently relative, do mark an even more complex horizon than you guess. The bad data on the public deficit at the end of last year is one of them, together with the evident deterioration in activity and its difficult recovery within a few months.

The Government published a few days ago that the deficit of all public administrations in 2019 stood at 2.64% of GDP, greatly worsening the forecast that the Executive had had throughout the year and, in addition, being more higher than the previous year, when it ended at 2.5%.

Last year there was a commitment to the European Union to reduce the deficit to 2%, despite the fact that a slowdown in economic growth and a rise in wages for public employees and pensions would take place. For this, there was a new budget that was going to incorporate taxes that would partially offset those higher expenses and with higher incomes thanks to the fact that the economy was expected to grow almost the same as a year earlier.

Little of all that was accomplished. The economy grew 2%, almost half a point less than expected, but much more than its counterparts; there were no new budgets and, therefore, no new taxes or increases in some of the existing ones, and in the end the worst forecast on the evolution of the deficit was fulfilled, which was the one sustained by the Bank of Spain from the beginning against the criteria of the Treasury and also of the Independent Authority for Fiscal Responsibility (AIReF), which maintained until almost the end that the deficit target could be met or have a slight upward deviation. The figure itself is not excessively bad, but it shows the political inability to contain public spending even under conditions that could be described as good: the Spanish economy ended the year with growth of 2%, a respectable drop in unemployment and, therefore, Therefore, a significant increase in the number of employees and in tax revenues from the main taxes: VAT and personal income tax. If the volume of public deficit reached in 2019 would not be too worrisome, among other things because despite this, the State has managed to slightly reduce the weight of the public debt with respect to national wealth during the past year, why then be alarmed?

It is clear that the health crisis and its direct economic consequences are going to shoot up the public deficit, both due to the higher spending that will be incurred and the lower income derived from the paralysis of private consumption, the increase in unemployment and of the lowest social contributions. Along with this, there are still no budgets for this year (the previous ones have been prolonged again) and both the increases in salaries and pensions have already taken place, in addition to the fact that the public sector has more employees than a year ago.

If this deficit deviation occurred last year (which was to take place again in the current year since there are still no budgets), the necessary measures adopted by the Government to face the health and economic crisis will raise it much more up to a figure that, today, nobody wants to venture, but that will necessarily be greater than 5% or at least 6%. The recognition of this reality is what pushes the Executive to put pressure on the partners of the European Union to obtain funds that allow them to face the situation without it implying a worsening of public accounts (the launch of an unemployment fund European that is spoken of could be an escape valve) or that at least a certain mutualization of assets occurs to issue in a way that makes them less expensive. Everything indicates that it is difficult to change the approaches against some countries, although some step forward will be taken.

But the bottom line is not how to get out of this messy situation. The economic and monetary authorities are ready to facilitate transit. The requirements to comply with the agreements of the stability and growth pact have been eliminated (countries can limit deficit and public debt levels without limit) and the European Central Bank will buy all the public and private debt that is necessary so that there are no problems liquidity. The problem is how the tendency to worsen public finances that traditionally presents the Spanish economy and the governments that manage it will be reversed, when it will be soon. Coming out of the crisis will demand new sacrifices from the whole of society, which, either are well explained and without falling into simplistic demagoguery, or may further encourage the populisms that have emerged in recent years. It is time to look for solutions to concrete and current problems, but you cannot lose sight of it, and some institution should start saying it, that some of today’s solutions may turn into problems tomorrow that will have to be faced with. resolution. Reconstruction will need to take place, but it will be painful.



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