The High Representative for Foreign Affairs of the European Union, Josep Borrell, pointed out a few days ago in a speech before the European diplomatic corps that “an important part of our prosperity has been based on the cheap energy that came from Russia and on business with China”.
How will we solve this problem, if neither one nor the other will be possible in the future? Most governments have embarked on a spending spree to alleviate the short-term hardships of their citizens instead of solving them or building an alternative. In this sense, there is no great difference between the decisions made by the British Prime Minister, Liz Truss, or Pedro Sánchez, although he blames everything on neoliberalism.
Truss reduced taxes by 58,000 million , including the wealthiest classes, to compensate them for the rising cost of living and the drop in income of companies and families. Sánchez triggers public spending in a desperate attempt to counteract the effects of the crisis without going to the source of the problem to correct it.
The European Union is cross-armed. Úrsula von der Leyen is incapable of arbitrating an agreement to even put a cap on Russian gas purchases or put together a platform for the unitary acquisition of this hydrocarbon for the winter.
British and Spanish policies lead to the same goal by different paths: the disproportionate increase in debt and public deficits. If anything, the British will be more effective in the medium or long term, because lower taxes will boost activity, while here the opposite effect will occur. In addition, the Minister of Finance, María Jesús Montero, will not have enough wealth to finance her social policies, as has already been seen.
The solidarity tax for wealth exceeding three million a year will raise only 1,500 million while the package of anti-crisis measures applied so far multiplies the costs by more than twenty, up to 35,000 million. Are these measures sustainable?
The answer is no. Economists blame central banks for inflation. The US Federal Reserve and the ECB kept the cheap money flowing as prices soared. But governments are also responsible, which maintain expansionary fiscal policies that fuel the rise in prices.
The former American president, Donald Trump, delivered more than a trillion dollars in citizen checks, which lasted well beyond the pandemic, contributing to the rise in inflation. The EU still maintains the escape clause active to fail to meet the 3% deficit target.
The solution implemented by Foreign Minister Olaf Scholz in the face of the gas shortage for this winter was to approve an aid package for 200,000 million, which has raised blisters in the rest of the European partners. Meanwhile, the reform of the electricity rate to make it less dependent on gas is still up in the air, as is the closure of nuclear power plants.
The problems multiply in countries like ours, without sufficient financial lung to continue with the spending train of recent years and with a debt and a public deficit at record levels.
A study signed by the executive director of Fedea, Ángel de la Fuente, one of the most prestigious think tanks , warned this week that if the 2023 Budget project is compared with that of 2018, the Sánchez period, public revenue they grew by 61,875 million, while expenses grew by 78,930 million (about 17,000 million more), which shows an imbalance of 50,000 million per year.
Fedea’s red numbers were ratified at the beginning of the week by the International Monetary Fund (IMF) , which forecast a public deficit above 4% until 2027.
The IMF thus confirms that the structural imbalance is one point higher than the objective put on hold by Brussels, thanks to decisions such as raising pensions or the minimum vital income by 8.5%, contrary to poorer neighboring countries such as Portugal, which foresee finish 2023 with a deficit of less than 1%.
Sánchez and Montero practice a policy of bread for today and hunger for tomorrow. The government is running out of room to sustain its splendid social policies. While in the 2018-2023 period, the GDP grew an average of 1%, revenues shot up 15% and expenses 18%, according to Fedea.
Treasury expects to collect some 244,000 million this year, with an increase of 9% over the previous year thanks to inflation. Montero estimates that next year tax revenues will rise 7%, to 262,781 million, which leaves a margin of almost 19,000 million.
Paper is already known to withstand everything. With a downward growth of the economy (the IMF reduced GDP to 1.2% for next year), and inflation in the middle of this year, voices are beginning to emerge that suggest that the increase in tax collection tax will be zero or very close to nothing next year. And more so after Brussels paralyzed the Next Generation funds due to lack of transparency.
How does the Government plan to finance the anti-crisis package, if last year it cost a whopping 15,000 million, to which should be added the 3,000 approved on Tuesday in the Council of Ministers? It will turn out like the mystery of the Virgin of Fatima, a miracle.
The lifeline to which official sources cling is that the collection in 2022 will be much higher due to inflation. They place it at up to 20,000 million, which would give to continue with the rate of spending. And what happens if the crisis drags on for more than a year or income is breached with such a complicated last quarter? May God not take confessions.
The pound collapsed after the powerful tax cut announced by Truss and the ten-year bond yield reached 5%, forcing the Bank of England to intervene to safeguard the pension plans of millions of British citizens. The position of the prime minister hangs in the balance less than a hundred days before her re-election, the grace period that should be given to any government.
The Spanish situation is not very different, with rates that will rise to around 4% at the end of 2023, a debt above one hundred percent of GDP as in the United Kingdom and a structural deficit of 4%, the markets will demand an adjustment in spending in the event that public revenues falter and the crisis deepens.
The Bank of England shield reassured markets for a few days, but Truss was forced to sack her Chancellor of the Exchequer following the Governor’s ultimatum that he would stop buying debt on Monday. The new Minister of the Economy, Jeremi Hunt, will have to rectify his plans and offer a solid fiscal path to regain credibility and avoid a crash in the debt markets next week.
Several experts are beginning to warn that the aid mechanism that restored calm to the risk premiums of the countries of Southern Europe a few weeks ago has been lame. The ECB has not yet clarified the rules it will require from governments to earn its protection.
In any case, they will go through fiscal austerity, as happened with Zapatero. The time for spending without control is running out and neither Sánchez nor Montero have yet found out.
Sánchez’s populist temptation is very high in a year in which his re-election and socialist hegemony in autonomies and city councils are at stake. Recalling Luis de Góngora: “I’m hot and people laugh. Let others try the governments of the world and their monarchies, while my days are governed by butter and soft bread, and on winter mornings, orangeade and brandy.”
The Government is in trouble, it will have no choice but to abolish or reduce the subsidy of 20 cents on gasoline or the general reductions in VAT on gas and electricity. That is why it will wait until the last moment, November, to decide whether to continue with these and other measures.
PS .- The other handicap for the world economy is China , which next week celebrates the XX Congress of the Communist Party to re-elect Xi Jinping at the head of its plans for the next five years.
The Chinese president will enter the history books with the renewal for a third term, which places him at the same level as Mao Tse-Tung, inspirer of the revolution, or Deng Xiaoping, the architect of modern China. But the reality is that Xi Jinping has screwed up on several fronts at once.
Its zero Covid health policy has sunk growth and sown discontent among the population; the real estate crisis, with price drops of 30%, spreads poverty among tens of millions of applicants to improve their social status and, finally, its restrictions on technology companies, together with the policy of alliances with the Russian president, Vladimir Putin, generate distrust in the West.
The last slap was received last Friday from President Biden, who prohibited the sale to Beijing of any product made with American high-tech components. China today is a wobbly giant with feet of clay. Its growth, according to the latest IMF forecast, will remain at 3.5% next year, a point and a half below Xi Jinping’s aspirations, a setback in its objectives and an irreversible brake for the rest of the Asian continent and the planet.