The very significant fiscal consolidation achieved last year — about 96% of the reduction in the structural government deficit achieved — is explained by events beyond the control of the government and the finance minister, which were revealed by the Council yesterday, Thursday. of Finance (CFP ), in a study on the evolution of government accounts in 2022.
The reduction in the deficit in 2022 is mainly related to the external inflationary environment, with a negotiated discount on interest rates that has been ongoing since 2021, when Fernando Medina was still in the Lisbon Chamber, and with the easing of the interest rates on government bonds that were still felt last year.
In other words, a new study indicates that by 2022, Finance and the government alone, with their own measures, contributed to a very residual part of the deficit reduction (4% of the total tightening).
If? The CFP shows that Medina’s “brilliant” and its “certain bills” are essentially the result of inflationary effects on the national economy (rise in the price of energy and imported food, later exacerbated by the war).
The external crisis naturally began to contaminate the Portuguese economy, but at the beginning very high inflation caused a significant increase in VAT and IRS revenues, indicates the entity chaired by Nazaré Costa Cabral.
In addition, Medina benefited from generous savings on interest payments to the country’s main official creditor (the Eurozone Fund, FEEF). But it was decided under the tutelage of João Leão, Medina’s predecessor in the finance ministry.
According to the Council, the structural deficit reduction, i.e. the measure to see whether the government is pursuing a restrictive fiscal policy (which slows the economy), expansionist (which drives the economy) or neutral, was even higher than the 2.5 percentage point (pp) reduction in gross domestic product (GDP) that enabled the final deficit of 0.4% of GDP to be reached last year.
There was a structural tightness of almost 3% of GDP. This value is higher because the CFP excludes an extraordinary measure that took place in 2022, the expense with deferred tax assets (245 million euros).
Government accounts experts say that “by removing the impact of the one-off measures, which do not lead to a sustainable change in the fiscal position, the deficit reduction (3 percentage points of GDP) was still supported by favorable economic developments (2.4 pp of GDP) and by the reduction of interest costs (0.4 pp of GDP)”.
In other words, 96% of the structural tightening came from these two elements outside government: inflation, which boosted economic activity and business sales and earnings. Plus interest.
The remainder, which is theoretically attributed to government action, as assessed by the change in the structural primary balance, contributed 0.1 percentage point of GDP to the improvement in the fiscal position [isto é, redução do défice]”, notes the GVB. That is, only 4% is direct government intervention.
fiscal explosion
The Council recalls that “this result [corte profundo no défice em 2022] benefited from significant gains in tax revenue due to the VAT’s automatic response to the rise in the prices of goods and services, accompanied by a failure to update IRS levels in line with inflation”.
“An estimate by the CFP indicates that failure to update IRS levels in line with inflation has benefited revenue from this tax by 0.2% of GDP,” about $513.5 million.
As the limits of the tranches were not adjusted to verified inflation (7.8%), there was ultimately a very positive impact on the Treasury. Managed to charge 3% more IRS.
The Council explains that “the IRS is levied on most of the income of individuals, regardless of their category (employment, retirement, capital and others)” and that “for this reason, and as in an inflationary context, the various income generated in an economy tends to also be affected by the growth of the general price level”.
Then another external element, interest. “Interest expenses amounted to EUR 4,687 million in 2022, minus EUR 484 million (-9.4%)”, a decrease mainly reflecting lower interest expenses on loans obtained under the PAEF assistance program [da troika] after the renewal of the FEEF loan [o credor, a facilidade financeira da zona euro, hoje ESM]which took place in July 2021, resulting in a reduction in the respective interest rate, as well as lower interest charges on government bonds,” the CFP explains in the study.
Finally, on the expenditure side, there are the savings among employees that are the result of a completely wrong inflation forecast for 2022.
“The salary update applicable to the civil service (0.9%), well below inflation, favored a partial and restrained government spending response, the main components of which, as they were not subject to automatic indexation, lost their weight saw declines in GDP,” the entity observes.
In all this, the CFP believes that the part that is the exclusive result of this government’s policy has resulted in the aforementioned tightening (reduction of the structural primary deficit) equivalent to one tenth of GDP. If it were up to the government alone, fiscal policy would have been somewhat restrictive, even with the measures and support programs launched last year, where the government said it was returning to households and businesses what they unexpectedly earned in inflation.
But thanks to the Recovery and Resilience Program (PRR), even in meager implementation (the CFP says the government has implemented less than 25% of what was planned for 2022), last year’s budget turned out to be somewhat expansionary.
Adding to the apparently restrictive effect the expansionary fiscal stimulus of 0.3 pp of GDP from the PRR on economic activity in 2022, it can be concluded that the implementation of the budget translated into a stimulus for activity of 0 .2 pp of GDP”. So we have an “expansionist policy stance,” says the CFP.
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Source: DN
