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The PP worries about the incongruity between worrying about debt and cutting taxes for the rich.

“When I heard the news, it seemed like a bad joke,” First Vice President and Economy Minister Nadia Calvino lamented this Tuesday, referring to Andalusian President Juan Manuel Moreno’s announcement of the liquidation. A wealth tax paid only by the wealthiest in Spain, except in Madrid and now the community in the south of the peninsula. “It goes against the global and European framework,” I continue.

And both from his ministry and various experts claim that, in addition, it is a position that does not correspond to the alarm that the PP itself has created in recent months regarding the sustainability of the public debt. “It is irresponsible to cut taxes in the face of rising interest rates and a historic effort to spend due to the pandemic, Russia’s invasion of Ukraine and the energy crisis,” they add to Economy.

Indeed, on the one hand, the European Commission and international institutions, such as the IMF or the OECD, put forward the need to increase revenues by taxing large companies and property. And Calvino and other government officials emphasize that Moreno’s decision “revealed the PP’s fiscal model: a downward fiscal race. [en este caso con Madrid] Which impoverishes us all, and it affects public services: education, health…”

On the other hand, it is also true that the debt burden — what Spain pays each year in interest — is rising after years of extraordinary financing conditions. And it’s just time to balance the impact of the energy crisis and inflation “without damaging public services or debt servicing,” they continue.

“Compared to our model of new temporary charges [a la banca o las empresas energéticas, o incluso a las grandes fortunas] and reduce specific taxes on energy to continue supporting families and companies affected by inflation, and increase the minimum interprofessional wage (SMI), guarantee decent pensions and improve the labor market, the PP model is to reduce taxes on the rich. Nadia Calvino herself.

As for the inconsistency of tax cuts at this time, various facts should be highlighted. First, while inflation contributes to higher government revenues due to higher prices and thus indirect taxes, Spain and the rest of the eurozone face a slowdown in economic recovery due to the war and central European decision-making. Bank (ECB) to raise interest rates to “cool down” economic activity and thus fight inflation.

Thus, low growth, even with the risk of a recession, increases in the cost of debt and the deficit forecast are still close to 5% in 2022 (where spending exceeds income) and 3.9% in 2023, after the highs of 2020 and 2021. For the pandemic, don’t set the best-case scenario for tax cuts, especially for the wealthy or for companies improving their profits, as the Bank of Spain confirmed on Thursday.

In fact, the governor of the Bank of Spain, Pablo Hernández de Cós, reiterated this Monday that it is not “the time to start the process of austerity or fiscal consolidation now”, while supporting the launch of an income pact between companies and workers. Against the backdrop of declining national income.

In a recently published report, Jesús Javier Reglero, a professor at the OBS Business School, makes a comparison of Spain with the debt limit that should not exceed the mortgage-laden family (financial costs should not exceed 30% of income) to explain the state’s situation. (See diagram below, extracted from document by OBS and University of Barcelona).

“Given these data, it can be said that the state has a much more secure income than the family, it can even increase it by raising taxes or introducing taxes. […] The second option is to demand more debt so that we can pay the deficit and therefore continue to increase the problem and complicate the solution,” reflects the professor.

Reglero, among other suggestions, points to the need to “use additional income” due to inflation, on the one hand, to pay down debt. And, on the other hand, “calculating the cost of the pandemic as health care costs, ERTEs, public assistance or other related costs financed by more debt and proposing a tax Disposable According to incomes and higher estates”.

Of course, since 2019, all major Eurozone economies have increased debt in absolute terms and in relation to GDP. Even staunch practitioners of fiscal discipline, such as Germany, have increased it to fund ERTEs, bailouts or subsidies to counter escalation. Energy, to directly support companies or to finance measures such as the Minimum Living Income (IMV).

In fact, despite already recovering pre-pandemic economic activity, Germany’s debt-to-GDP ratio is up to 70%, up from 58.9% in 2019. and in France to 114%, from 97.4% in 2019. and in Italy. That ratio, a key measure of debt sustainability, rose to 150% from 134.1% before the pandemic.

A full recovery in Spain is not expected until 2023 or 2024 due to Russia’s invasion of Ukraine and a sharp slowdown in inflation. Spain’s economy took a big hit in 2020, with its reconstruction dependent on tourism and other services that took longer to recover from the effects of Covid. Debt fell below 117% of GDP in June for the first time since September 2020.

Debt has been exactly 116.8% in recent quarters due to recovery in economic activity and inflation. And the government is sure that “the trend is compatible with the forecast of 115.2% of the GDP of the public debt made in the stability program last April”.

Finally, our country issued in June – all maturities taken into account – all debt at a cost above the average interest rate, which has fallen to a historic low in recent years, according to Treasury statistics. It was again issued below average in July and August, but in the current cycle of rising benchmark interest rates this will be somewhat anecdotal and new debt issuance will pick up from September.

Despite this increase in the cost of funding, conditions remain very good. So the interest tax the government faces each year will rise, but expectations are that this bill will barely budge from 2% of GDP, a far cry from 3.5% in 2013, following the euro crisis.

The ECB strengthened its expansionary monetary policy shock of the Covid pandemic, but the institution was forced to gradually withdraw from the end of 2021 this extraordinary stimulus, which consisted of lowering official interest rates to historic lows and creating billions of euros to buy public debt and guarantee market demand for companies. subject to certain conditions.

Thus, it now faces the difficult challenge of tightening financing conditions to stop fueling runaway inflation without particularly damaging the countries with the largest fiscal imbalances. Among them, Spain and Portugal, Greece and Italy will follow. To do this, the ECB is implementing new mechanisms (they are explained here), for now without conditionality. That is, monetary support continues.

If there is a condition to maintain this support, it will be based on deficit targets, which are also key to the evolution of the debt.

Source: El Diario


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