Íñigo Fernández de Mesa, president of the Institute for Economic Studies (IEE), has presented the ‘Opinion Note on the General State Budgets for 2021 ’, which he describes as expansive, supported by an unrealistic economic scenario and very voluntaristic income estimates. This combination is very worrying because the deficit and debt will be higher than expected, which will increase the vulnerabilities of our economy, with the consequent damage to the credibility of the sustainability of public finances. In addition, the tax increases that they propose on companies do not help to promote the recovery of activity and employment, nor do they make our country more attractive to attract investment and retain talent.
From the IEE they believe that the government's macroeconomic picture is not very prudent in its growth estimates for 2021, especially after seeing the evolution of the pandemic worldwide in this fourth quarter. The restrictions that it will entail will negatively affect the recovery, at least for a good part of the first half of 2021, so that the growth forecast for next year may suffer significantly.
Compared to the optimistic 9.8% (with European funds) of the Government for 2021, the Commission estimates a growth of only 5.4%. Other national and international analysts estimate growth for Spain around 7%, but it is very likely that this figure will be revised downwards given the recent evolution of the pandemic.
The Government takes advantage of the flexibility of the spending rules to increase it
With this scenario, the Government has justified a budget for 2021 with a very expansive spending policy, in such a way that the public spending of the AA.PP. it is close to 50% of GDP. The increase in total spending in the consolidated state budget is 19.4%. This notable increase is supported, on the one hand, by the money that is expected to arrive from the EU (26,634 million), but is also marked by discretionary decisions of the Government, especially in social matters.
According to the IEE, as analyzed in the Report, it is not incompatible to respond, in this economic context of crisis, to the social demand and to the support of the structural transformation that our business fabric requires through an expansive spending policy with an improvement quality and efficiency of the same. If in Spain the efficiency of public spending were to be similar to that of the OECD average, we could provide the same current public services with 14% less spending, that is, according to the PGE-2021, some 58,000 million euros , and the savings could be greater if we homologated to the best practices.
It should be noted that non-financial expenditure in the consolidated budget grows by close to 10%, once financing from European funds has been excluded, a figure even higher than the strong growth in expenditure of 8.1% forecast for 2020.
In this sense, it should be noted that, despite the increase in the allocation for economic policies, the additional boost that these European funds represent is not fully exploited. Although the importance of the over-financing of European funds on the total budget items is concentrated on actions of an economic nature, the weight of the funds in actions of a social nature is no less significant. The specific contribution of these on social policies for access to housing and promotion of building (73.3% of total expenditure in this item), health (57.9%), education (36.8 %), social services and social promotion (22.4%), culture (17.4%) and promotion of employment (16.1%).
Tax increases on companies that will weigh down the recovery
In addition, according to this body, the announced fiscal measures will increase the tax burden for taxpayers, which, together with the overestimation of public revenues, will compromise the budgetary objectives.
The tax burden on Spanish companies, relative to GDP, is almost two points higher than the EU average. Well, around 80% of the tax increases are aimed at companies, which will harm the recovery of activity and job creation. To which we have to add that we live in a globalized world, with mobility of people and capital, and that the competitiveness of an economy does not only reside in its companies and its workers, but also in its economic and regulatory environment, as well as in your fiscal framework.
Increases in Wealth Tax or Personal Income Tax can cause the relocation of people with more human capital to these other territories, and complicate the attraction and retention of talent for our companies, in addition to ending up negatively affecting the collection as a whole tributary.
For its part, limiting the exemption for dividends and capital gains from Corporation Tax to 95% is very harmful, since it is equivalent to an additional tax. Again, very few EU countries have limited the correction of double taxation to 5% in their tax system, which causes its introduction in Spain to cause a competitive disadvantage to our companies, due to the increase in their cost of capital , in relation to those of other countries. The proposal harms companies because it represents a barrier to their internationalization. Among other effects, the tax penalty forces reorganizations in the structure of companies when their priorities should be different, and introduces a tax motivation to delay shareholder remuneration and repatriation of capital over time. In addition, it involves double taxation on the same income, since it falls on income that has already been subject to tax previously.
The increase in VAT from 10% to 21% for sweetening beverages is unfair and discriminatory, imposed at the worst possible time and without international experiences being conclusive regarding its ability to modify eating habits. From the perspective of smart taxation, it would be mandatory to exclude beverages with non-caloric sweeteners from this VAT hike, as other countries have done. Other measures, such as the increase in diesel rates, are not adopted at the best possible time either, since they affect a sector that of the automobile, which is key in our economy. Likewise, it should be noted that the increase in the Tax on Insurance Premiums discourages hiring for more far-sighted taxpayers.
In addition, with the recent approval of the new tax on financial transactions (on capital increases of large companies), this operation will be displaced to third countries, with the consequent contraction of the size and liquidity of our market and the increase in the cost of cost of capital of our listed companies in relation to those of other countries.
Public deficit and debt
The increase in public spending is supported by an increase in income that is not very credible.
In this optimistic scenario, and considering that the 6,000 million that the Government is targeting could be collected through additional taxes and increases in those already existing, we estimate that the collection would be at least one point of GDP lower than that considered in the budgets. Obviously, in less favorable GDP scenarios, the tax mismatch would be considerably greater.
The Government estimates a deficit of -11.3% for this year and -7.7% for 2021. However, the situation may be significantly worse. In this sense, the European Commission estimates a deficit for our country that will rise to -12.2% in 2020 and to -9.6% in 2021, which is implicitly questioning the public deficit figures not only of this year, but also the next.
Our structural deficit is already one of the largest in Europe according to the European Commission, and according to the Government it will increase to 6.1% of GDP in 2012, compared to -5.4% recognized for 2020. Therefore, it is especially It is worrying that part of the increase in spending foreseen in the budgets could become a structural increase in it, which further complicates the necessary fiscal consolidation that will have to be faced in the coming years. This fact would weigh down the confidence of the agents and the competitiveness of our economy, jeopardizing economic growth in the medium and long term.
On the other hand, the notable increase in public debt is also a problem that makes our economy more vulnerable to possible external shocks. The Budget plan for 2021 estimates an increase in public debt to 118.8% of GDP by 2020 and contemplates a slight reduction to 117.4% by 2021.
On the contrary, the European Commission estimates that in 2020 the debt will rise to 120.3% and will continue to grow in 2021 to 122% and up to 123.9% in 2022, reflecting a very negative dynamic that could complicate and make it more expensive our financing in the coming years, especially if the ECB tightened its monetary policy.