The Government has just announced a new battery of measures to mitigate the economic impact of the war in Ukraine, which has materialized in a sharp rise in prices. A package that the Independent Authority for Fiscal Responsibility (Airef) estimates at 7,000 million and that will lead to an increase in the deficit of 0.5% in 2022 compared to the agency’s previous forecasts. This was highlighted on Monday by its president, Cristina Herrero, during her appearance at the Congress Finance Commission, in which she also slipped that there will be a downward revision in growth forecasts in the next report that the entity will present in July.
“Some of the risks that we pointed out have not been resolved, but have materialized,” said Herrero. “Almost all agencies, if not all, are revising their growth forecasts downwards and their inflation forecasts upwards. And the truth is that the binomial between inflation and growth is becoming increasingly adverse”, he assessed when describing the changes that have occurred in the domestic and international economic panorama since the Government presented its Stability Program at the beginning of last May, in which it projected a GDP growth of 4.3% for this year compared to the 7% previously estimated.
Among the risks that have not dissipated are bottlenecks in supply chains or the rise in energy prices aggravated by the conflict in Ukraine. A direct consequence of this is a rise in prices that has become persistent and is causing a tightening of financial conditions, with rises in interest rates. Airef stresses that the doubts surrounding the execution of the Recovery Plan investments, key to underpinning growth and on which the agency has been requesting more information for some time, have not been cleared up either. “All of this will lead to a reassessment in the next reports, in line with most analysts, who are revising their growth forecasts downwards and their inflation forecasts upwards,” the entity said in a statement.
Herrero has clarified that the macroeconomic scenario of the Stability Program is feasible and very similar to the one drawn by the institution, despite the persistence of old and new risks and the high level of uncertainty. “We all thought it was going to be temporary,” he said in relation to the price hike that began last year. “But 2022 arrives and the conflict over the invasion of Ukraine by Russia occurs, and all these factors that had appeared in 2021 are greatly increased.” Not only in number, but also in persistence. “Although the context is changing and extremely uncertain, what is clear is that the position of the European Union countries is increasingly weakened from the point of view of sustainability.”
Airef has advanced that in the next July report it will review its budget forecasts ―it now calculates a deficit of 4.2% for 2022, compared to 5% estimated by the Treasury, and 3.9% for 2023―, in light of the new measures approved by the Government to mitigate the impact of the crisis in Ukraine. In April, the Executive launched a first package ―initially in force until June 30―, which included measures such as the fuel discount or the extension of the VAT reduction on electricity from 21% to 10%, for a total of 6,000 million euros, according to Airef. Last Saturday, the Executive extended this package until the end of the year and expanded its scope, with novelties such as the reduction of electricity VAT to 5% or a check of 200 euros for low-income workers, self-employed and unemployed.
The control body estimates that this extension has a cost of 6,989 million ―compared to the 9,000 estimated by the Government― and that, as a whole, the measures to mitigate the effects of the crisis will mean an increase in the deficit of 1% of GDP , an invoice of 13,061 million.
With these wicks, and despite the fact that the fiscal rules remain suspended, Herrero has once again insisted on the need to design a medium-term strategy and prevent temporary spending from becoming structural. “Certainly, it is not easy to do. But this planning supposes the possibility of establishing objectives, in some cases more specific and in others more imprecise. They allow you to determine where you want to go, how you are going to do it and, therefore, analyze the causes of the possible deviations that may occur in its fulfillment”.
Likewise, it has requested that the extra income that is materializing thanks to the pull of collection, pushed by inflation and salaries and pensions, will not end up in increases in spending or reductions in income that do not have the corresponding financing.