Jose Maria Rotelaar | Sanchez and the Economics of Science Fiction

President Sanchez’s CEO remains determined to flaunt an economic policy when it simply caused serious structural imbalances that, thanks to the anesthesia of public spending, allowed him to keep macroeconomic indicators afloat without reversing that deterioration, in the day when citizens suffer every day at Buying or paying a mortgage. Sanchez and Calvino live in a science fiction economy, which will end up going into decline once compliance with fiscal rules returns. To avoid this, it is necessary to reduce spending and implement deep reforms that will strengthen the economy, but the socialists despise this possibility and run forward.

And so, within this science fiction, the government sent to Brussels, at the end of April, an update of the stabilization program for the period 2023-2026. It’s a document based more on political arguments than technical ones, as there are some economic elements that don’t hold up.

• Thus, it pledges to reduce the public deficit and leave it at 3% in 2024, one year ahead of schedule, but does so without spending adjustments and based on very optimistic expectations of increased revenues.

• This is unwise for three reasons:

o The first, because the economic horizon is not an acceleration, but a slowdown.

o Second, because the incremental increase in income caused by inflation will not be sustained indefinitely, nor will the effect of nominal GDP on the denominator of the deficit-to-GDP ratio be maintained, once inflation subsides.

o Third, because although there were more than 30,000 million additional incomes, mainly due to inflation, during 2022, they barely reduced the deficit by a tenth of the initial forecast, which indicates that this government is constantly increasing spending, which seems likely. That he will do so in 2023 and beyond if he continues to rule after the elections.

• In this way, the stability path sent by the government is 3.9% of GDP in 2023. 3% in 2024; 2.7% in 2025; and 2.5% in 2026.

• In order to reduce the deficit from 4.8% at the end of 2022 to 3% in 2024, the deficit must be reduced by more than 25.000 million euros.

• It is clear that the government, due to the trend of spending, will try to raise taxes, which will harm the economy and employment more and stifle families and companies more, because the estimate given by the government for growth is not reliable. for the above income. Inflation, in the scenario of economic slowdown. His deficit adjustment, even if it is correct, which says a lot, will come from the tax side, not from spending cuts if it is Sanchez who continues to lead the government.

• This amendment is also proposed with a lower margin for AGE and a higher margin for autonomous communities and EELL. This is unwise because:

o In 2024, the Autonomous Communities will receive very positive payments from the SFA, because in 2022 the additional collection derived from inflation is very high. This will improve the balance of the budget in the CCA, and worsen the balance of the AGE, which will have to pay. Thus, if CCAs are given more leeway, they will not reduce spending and AGE will have to make a larger spending adjustment that is not proposed in the plan, and it will be difficult to comply with this reduction path.

o The severely deficient Social Security cut is not credible, due to the increasing pressure to retire in the early baby boomer generations. The Escrivá system amendment does not expect a revision until the end of that year, so that the revision will not be applied in 2025 due to the possible skew in spending, which does not seem achievable to reduce the Social Security deficit of 0.5% of GDP in 2023 to 0.1% in The year is 2026. And they entrust everything to the reform of the pension system which, as is well known, actually leads to more instability, by not controlling spending, but trusting everything to increase contributions.

• They expect a primary deficit (excluding interest on debt) in 2024 of 0.4%, which means that the deficit that year, of 3%, will be only 2.6% in interest on debt. In 2026, they expect a primary surplus (excluding interest on debt) of 0.4% and a total deficit of 2.5% in 2026, when, really, because of interest, we will have a deficit of 2.9 points, which is a worrying element that indicates that. How the third trimester burden (debt interest) will grow exponentially more unsustainable if spending is not reduced.

• The reduction in debt that they expected was achieved only through a larger increase in nominal GDP, and not through debt reduction in absolute terms, since there is still a deficit. Since the GDP growth scenario is unrealistic, this decline in the deficit ratio is also called into question, especially when considering the implied GDP deflator falling to 1.9% in 2026.

• They are considering the budget panorama in an optimistic scenario, of prosperity, not even neutrality, which practically guarantees an imbalance of the budget.

• Thus, they maintain a growth of 2.1% for 2023, which despite the revisions will have to be seen if it is met; by 2024 they have raised it to 2.4%; In 2025 they left it at 1.8%. And in 2026 at 1.7%, all very high growth given the current uncertainties, which reduces short-term growth of GDP until it equals potential GDP in 2025 and lags behind it in 2026, which is an element that could dampen collection, in an environment , moreover, as the aforementioned natural growth does not increase in these two years, but instead maintains the same rate of growth as among the previous years. In addition, a half-point improvement in potential growth from 2023 to 2024 looks very optimistic, an element that should dampen the outlook even further.

• Expect optimistic investment growth: up to 5% in 2024, far from reality. They entrusted it to the recovery plan, but the failure to manage it indicates that it is difficult for them to achieve the said goal.

• Related to that, it seems unrealistic to achieve 1.1 million jobs in the period, as well as for the unemployment rate to fall below 10% in 2026 (9.8%), however, it will still be very high.

• Likewise, productivity deteriorated in the period compared to 2022, which hinders the competitiveness of the Spanish economy. This loss of productivity and competitiveness does not allow us to believe that exports will be able to grow at the rate expected by the government, which weakens the stabilization plan itself, because the growth of the economy is based on improving exports.

• Indeed, no jobs will be created even in such an optimistic scenario, because, as they themselves admit in the plan presented, the variance in job creation is higher than the increase in actual working hours. Therefore, even in this optimistic assumption, employment is not created, but employment is distributed, which is different and shows the lack of dynamism of the economy.

• They themselves mention the risks of continued secondary inflation leading to intensification of contractionary monetary policy, something that is happening and could make the state of economic growth much worse. It is not an unbearable risk and therefore, the scenario proposed by the government is overly optimistic. On the other hand, they consider that the new problem of financial instability associated with the banking sector has little effect. An additional 120 basis points in interest rates would worsen GDP by one tenth in 2023, four in 2024, six in 2025 and eight in 2026, with a negative impact on employment of about one point in 2020. last year. Similarly, a one-point drop in growth in the eurozone, which would occur if monetary policy were to tighten further, would worsen growth by between one-tenth and six-tenths. All of this means that growth could be between four-tenths and 2.5 points lower than expected, with a similar impact on employment.

This plan reflects the general lines of action of the Sanchez government between 2023 and 2026 and, as we can see, is unrealistic, because it is overly optimistic, because it is based on GDP growth that is difficult to achieve and because it is unrealistic. Considering much more likely risks in the base scenario. What the government is considering, so that what is practical is that neither the growth nor the level of employment committed to Brussels will be achieved, which may also cause the established stabilization path to be compromised, whether in the event of a deficit or debt over output gross domestic. Thus, Sanchez will leave a poisoned economic legacy to his successors in government, no matter how well he covers the data with cellophane and wrapping paper.