The governor, Pablo Hernández de Cos, refuses to “generalize” tax cuts and increases in government spending, given the possibility that tax revenues will falter in the future
The governor of the Bank of Spain, Pablo Hernández de Cos, has poured cold water on households, companies and politicians who manage the administrations by warning them of a harsh reality: “Let them assume a loss of income”, he indicated during his speech to the Budget Committee of the Congress of Deputies. And he left no one behind. Not even retirees, by confirming the “risk effects” that the revaluation of all pensions will have based on the evolution of inflation, with the expected increase of 8.5% for next year, as reflected in the public accounts of 2023.
Hernández de Cos’ message, in front of all parliamentary groups, has been stern in terms of the “signals” to be given to stop inflation. “There is a loss of well-being, yes or yes,” he indicated. “All we can do is spread the cost” of inflation. Either only in the private sector (between employees and companies) or with the public, including “civil servants and pensioners”.
In this sense, he advocates the protection of the most vulnerable pensioners, with a revaluation of minimum benefits next year in line with inflation, estimated at 8.5%. But not the rest of the pensions. In any case, he insisted that this exception would be “temporary” because the law specifies that the revaluation must be confirmed at the average November to November CPI of each year, as Congress voted at the time. But at the same time, he has insisted that this reality must be “compensated” with measures that stabilize social security, either with more revenue or with less spending.
In this context, the governor has addressed all economic agents about the loss of income. “Mainly companies and households, but also governments,” he says. So that they all internalize “the loss of income that the price increase brings” from the commodities that Spain imports and the effect of inflation. The governor has insisted on the message he has delivered in recent months amid the debate on the revaluation of pensions. “Government spending should avoid the widespread use of automatic indexation clauses in a context where the margin” of the state is “very limited due to the size of government debt.”
The Bank of Spain calculates that each percentage point of the pension revaluation will increase spending on this budget item by €1,800 million, which it says represents a “very significant pressure on public spending”. So much so that Hernández de Cos believes that the increased spending obligations resulting from the increase in pensions with the CPI, as well as the withdrawal of the sustainability factor (the adjustment of the first pension based on the financial evolution of the system and the economy ) “not yet compensated” by the other savings measures of the Ministry of Social Security, such as the premium increase from 2023 or the early retirement penalty.
The governor has included the nine million pensioners in Spain (six million pensioners) among all citizens who have to bear the consequences of inflation on their wallets. In fact, he finds it essential to agree on the income pact he has asked between unions and employers to share “the cost” of inflation between companies and workers.
However, the regulator has so far failed to see that wage increases are the factor driving prices in Spain. In fact, Hernández de Cos points out that “inflationary pressures have been transferred to wages and corporate margins in a very controlled manner.” Two factors that, based on the data analyzed by the institution, “have been relatively stable”.
But the Bank of Spain is looking to the future and warning of what could happen as a result of the inflation safeguard clauses that companies and employees agree to. These clauses have increased: they are now present in 25% of new salary agreements in every company, compared to the 16% average last year. This greater presence of these conditions to raise wages in the future so that they do not lose purchasing power “increases the risk that more intense second-round effects on inflation could occur in the future than have been observed so far.” That is, the rise in wages implies higher prices and so on, constantly in a kind of dizzying spiral, one of the most pronounced risks of the Bank of Spain in its studies and the interventions of the governor.
The appearance of the head of the Bank of Spain has served to analyze the 2023 budget project and has emphasized the evolution of tax revenues (which the administration collects for personal income tax, VAT, companies, etc.) and on the current avoid a “general fiscal impulse” in terms of taxes (with cuts for all sectors) and large public spending.
Hernández de Cos has indicated that “tax policy can no longer be a general impulse”, in turn responding to the committee’s political groups. According to him, “we need to support the most vulnerable, temporarily, but without a general fiscal stimulus,” he insisted.
Its records surpass pre-pandemic records, although it has asked the Treasury Department to act “with caution” to prevent these higher incomes from driving higher spending, dependent on taxes, due to the negative effect these dynamics could have on the economy. future.
Hernández de Cos has assured that the Bank of Spain’s forecast for this year is a higher collection than the government forecast, which would make it possible to offset both the lower growth in 2023 (it forecasts a GDP increase of 1, 4% compared to 2.1% of the executive) as upward deviations in government spending, to which he sees “upside risks” in interest spending, unemployment benefits and pensions.
In any case, he pointed out that the budget plan points to a fall in public expenditure relative to GDP of almost one point (0.9 percentage point), mainly due to the reduction in subsidies (0.6 points less), which in total In that case, this would be partly offset by the increase in social transfers and interest.
In his appearance, the governor has demanded “caution” in using the largest income cushion in the face of “ignorance” about the reason that explains the largest increase, citing the higher income obtained in the years of the housing bubble and thus warning against the risk that this increase could disappear and public accounts deteriorate. “I urge that this increase should not be considered permanent in its entirety until the origin of the decoupling between tax collection and macroeconomic tax bases observed since 2020 is known,” he stressed.
In fact, the calculations of the Bank of Spain state that a “very significant” part of this extraordinary income collected by the state (70%) is due to the “intensive economic growth” sustained in Spain between 2021 and 2022, after the end of the pandemic; but also due to the rise in tax bases and the rise in prices, a “very obvious” reality in the case of VAT revenues. The remaining 30% of the increase in tax revenues are not exactly sure what the Bank of Spain is to blame. Surprisingly, he alludes to the fact that “it could be due to multiple factors, including, for example, a possible rise of the shadow economy.”
On the government spending side, the governor has warned that there are risks of upward deviation in some spending items in 2023 compared to what was budgeted. It would affect, among other things, interest charges, unemployment benefits and social benefits, especially pensions.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
